Market Update: The Current State of Self-Storage

The ongoing global pandemic caused by COVID-19 has certainly affected several commercial real estate asset classes but one that has maintained its stability is self-storage, continuing to be an attractive asset class among several lenders and investors. To update our readers on the current state of the self-storage market, we asked our colleague William DeFanti, Vice President at PSRS, to provide his thoughts on the current state of self-storage and give an overview of loan terms several lenders are currently pricing.

Q&A

Out of the commercial real estate asset classes affected by the COVID-19 pandemic, self-storage has so far shown that it hasn’t been affected nearly as much as office or retail, are you seeing that same stability now with the self-storage clients that you work with?

Yes, absolutely because in times of economic turmoil, self-storage occupancy rates skyrocket and this asset outperforms every other asset class in addition to the stock market. Self-storage is known during these times to be recession-resistant since the 1990s and tends to perform well because of four attributing factors: dislocation, divorce, death, and disaster. These factors all affect the demand for storage due to people moving, downsizing, selling their homes, storing their relative’s belongings, etc.

Which lenders are the most active in pursuing self-storage financing?

Life companies are the most competitive, but I would say that all lenders love any stabilized storage with 5 years or more of history. It is currently one of the most appealing asset types in the lending market and commands just as good pricing as multifamily assets. The stabilized history can outweigh location, as some lenders can be taken aback on location and may not want to lend given the demographics. A proven track record of year-over-year stabilization can compel lenders to overlook their location.

Lenders are seeing some markets being oversaturated with self-storage, leading them to lean on feasibility studies that show the overall storage square foot per capita. The average across the country is ~7 sq ft/capita in a 3-mile radius. If lenders see any more than that, they will use this metric to see how much storage is coming to the market. Overall, it is becoming harder to finance in oversaturated markets. One aspect that these studies do not reflect is whether the storage available in these markets are class A, climate-controlled, automated facilities, or older mom-and-pop facilities. Key-less, automated technology in these newer storage units are now expected by lenders on any new facility that is built and are in more demand now due to the ongoing pandemic.

Summary of how major lender segments are pricing Self-Storage

• Life Insurance Companies:
  • Looking for a minimum of 5 years of stabilized history
  • 30-year amortization
  • Will get to about 65% Loan-to-Value
  • Most competitive at a 1.50 Debt Coverage Service Ratio (DCSR) or greater
  • Pricing: 180 basis points over the respective treasury
  • Will go 15-20 years of fixed-rate, commanding about 5 basis points to the spread over a 10-year deal
• Banks:
  • 3.75% on a 1.25 DSCR
  • 25 yr. amortization
• CMBS:
  • 8.5% Debt Yield
  • Price to about 3.50% coupon
  • 30 yr. amortization
• Credit Unions:
  • 4% on a 1.25 DSCR
  • 25-30-year amortization depending on location

Feel free to reach out to us with any questions or with any opportunities that you would like to discuss with us!