The economic impact of the coronavirus pandemic has hit the nation’s self storage industry – dealmakers, owners, operators, developers and others all trying ways to adjust.
Risk-averse behavior has grown among developers and bankers; non-recourse funding has almost disappeared, accounting for a jump in recourse deals. Deal making has slowed, with CMBS (commercial mortgage-backed securities) on life support, weakened supply chains and a longer permitting process as city employees go on furlough.
The SpareFoot Storage Beat spoke to four self storage experts about what developers and financiers can expect in the next few months and how they’re coping.
Charles Byerly, President and CEO, Westport Properties Inc., Irvine, California
“I think we’ll continue to see development happening,” Byerly said. “Some projects may stall out. Depending on how far along they are, some will continue moving forward, some won’t. Part of that will be influenced by whether not a developer owns the land and/or doesn’t have another use for it.”
Byerly is pleased that construction is considered an essential service because he has just broken ground on one project. He also paused some other new projects.
“We’re monitoring government regulations to make sure nothing pops up that would pause the construction site,” he said, adding that supply-chain issues might delay projects.
“New opportunities will exist for developers willing to see dropped projects through where the previous developer did not have the stomach or perhaps the time to see a project through,” he said.
Byerly added that capital markets have slowed down, putting deals on hold. Elsewhere, lenders have re-traded the terms by reducing loan proceeds, changing from nonrecourse to recourse, and/or reducing interest-only periods.
Bill Bellomy, Bellomy and Company, Austin, Texas
“Everything is on standstill,” said Bellomy, a founding partner of the boutique firm that opened in 2008; it sells self-storage facilities nationwide. The company has had to extend the closing of most of its deals between 30 and 60 days, he said.
“It’s one big re-set, one big pause button, very much a wait-and-see approach right now,” he said.
“Financing is getting a lot tougher. We’re in the capital markets business and we need readily available debt. We’re starting to see that debt is getting harder to get and its pricing is not as competitive as two months ago. The CMBS market has completely shut down.”
His clients are hungry for information.
“They’re really curious how the self storage operators are doing,” Bellomy said. “Are they waiving late fees? Are they completely shutting the store down? Are they working half-days? Are they furloughing their manager?”
His firm closed 36 transactions in 2018, then 25 in 2019.
“This year, in closed deals and deals in escrow, we’ve done 13 deals right now,” Bellomy said. “We were off to a good start.”
Ryan Clark, Director of Investment Sales, Skyview Advisors, Tampa, Florida
The company had a strong first quarter, and though most everyone’s Q2s will take a big hit, “I still think that based on what we have in the pipeline, deals are going to take more time to get done, but we’re confident they’re going to get done,” said Clark, who operates from Akron, Ohio.
Due diligence is being delayed because people are following stay-at-home rules in most states. Regarding slower financing,
“We’re seeing more offices coming in with finance contingencies and buyers needing more time to make sure they can secure financing for the acquisition,” he said.
Still, Clark remains optimistic about the future. “I do think that self storage has a reputation for being more resilient than other asset classes,” Clark said. “So we’re seeing that play out as we speak.”
Steve Libert, Principal, CCM Commercial Mortgage LLC
There’s at least one bright spot in all this.
“There is money out there,” said Steve Libert, co-founding principal, CCM Commercial Mortgage LLC in Skokie, Illinois. “There are many other sources for self-storage financing other than the CMBS market, and rates are still very low."
“We are shifting away from CMBS towards alternative financing sources. If the borrower is OK with recourse, we can go to the bank for a very similar loan with 75% loan-to-value from banks and other sources, and the rates are super attractive.”
Libert noted that lenders like self-storage deals because the facilities generally have hundreds of tenants, and a few missed payments will have much less impact than a retail center with multiple closed stores.
He advises bankers to “cherry-pick loans, because we’re not competing with those lenders that originate loans to sell the paper into the secondary (CMBS) marketplace.” But he also cautions that the portfolio lenders are very busy these days, given that banks are working to process large numbers of federal loans, etc.
He and Neal Gussis, also a co-founding principal, started their boutique company in 2013, and they do between $200 million and $250 million in financing each year, most of which is for self storage.