The window of opportunity for self-storage developers to capitalize on favorable market conditions may be a short one. While interest rates, loan terms, capitalization rates, and facility rental rates and occupancy levels are all currently favorable, the message from experts during the Inside Self-Storage (ISS) Developers Conference in New York City last week was for owners and investors to act quickly but diligently.
"How long is the window? Your guess is as good as mine, but the opportunity is here now, so seize the day," said RK Kliebenstein, vice president of acquisitions for Metro Storage LLC, which operates more than 75 self-storage facilities in 11 states under the Metro Self Storage brand. The company currently has 21 development projects underway, he said.
Kliebenstein opened the conference with a discussion on the general climate of development in the industry. Afterward, a full lineup of presenters delved deeper into specific topics including feasibility, financing, new construction, building conversions, renovations, facility expansion, and boat and RV storage.
The one-day event at the Jacob K. Javits Convention Center drew nearly 100 participants from 28 states and five countries, including participants from Bahrain and Ecuador. It was designed for investors, developers and aspiring self-storage owners interested in the business as well as current operators with plans to expand their portfolio or renovate facilities. Expert insight included case studies to illustrate specific development strategies.
Although many in the industry believe the current development window may last as little as two to three years and favors those already in the industry, Shawn Hill and Devon Huber, principals with self-storage financing firm The BSC Group LLC, indicated loans are available to qualified borrowers.
"Rates are great; money is flowing," Hill said. "Getting money is not as big of an issue as it has been in the past." Based in Chicago, BSC Group had a record year in 2013, closing 54 loans on 99 properties totaling more than $319 million. The deals included more than 30 small-balance loans under $5 million that used a wide range of funding types including commercial mortgage-backed securities (CMBS), Small Business Administration loans and balance-sheet executions.
Hill estimated that 90 percent of new self-storage construction loans are being issued by community banks, a clear change from the lending climate during the recession, when institutional real estate companies tied up most of the localized lending capacity because they were unable to obtain financing from firms operating on Wall Street. The change in dynamics means there are increased financing opportunities for small, private developers who qualify.
"Today, CMBS is back. Insurance companies are back. Everyone is in the market lending," Hill said. "That sucks the big guys upstream, where they can get much more efficient financing."
The primary difference between now and pre-recession financing is lenders are being much more cautious with where funds are going. "They got their butts kicked during the recession," Hill explained. "Now they are being told they have to put money back to work again. A lot of what we are dealing with today is convincing the lender that your deal makes sense."
Among the criteria being scrutinized by lenders is whether or not a self-storage site has high visibility, a management team is in place and how much current and potential competition there may be around a development site, Hill said.
Increased scrutiny from lenders means developers need to do their due diligence in finding viable sites on which to build, beginning with a thorough feasibility study, according to Jeff Kinder, president of Advantage Advisors, a consulting group specializing in self-storage. Kinder's presentation focused on feasibility, including the characteristics of a good site, how to evaluate a location, determining effective land cost and reviewing competition in the market.
"Your feasibility study has to be the thing that convinces you not to do this," he said. "You have to understand what the risk is."
Common mistakes new self-storage developers make include assuming self-storage will automatically be a good fit for a piece of land that may not be suitable for other commercial applications and underestimating the time it takes to lease up a property, Kinder said.
"The first year of mature operations won't be until your fourth year," he noted. "Understand what that means for your financing."
Other speakers during the conference included Rick Dodge, vice president of Paramount Metal Systems, and Frank G. Relf, principal for Frank G. Relf Architect P.C., who presented on new construction; Jim Ponti, regional sales manager for Janus International, who spoke about building conversions; and Bob Hayworth, CEO of Baja Construction Co. Inc., who discussed issues related to developing sites for boat and RV storage. In addition to handling opening and closing remarks, Kliebenstein addressed the topics of facility renovation and expansion.
After the conference, attendees were invited to tour Gotham Mini Storage at 10th Avenue and 39th Street in the Hudson Yards area of Manhattan. Opened in 2012, the seven-story, 240,000-square-foot conversion project offers more than 2,000 units and a wealth of amenities including free WiFi, a coffee bar, work space, a drive-in freight elevator, a free move-in shuttle, custom-built units, a concierge for moving services, a full suite of moving supplies, carpeting, energy-efficient lighting and more. This after-hours tour and wine and cheese reception was sponsored by self-storage building manufacturer Janus International, which worked on the Gotham project, co-owned by real estate developers Jack Guttman and Steve Schwartz.
Additional ISS Developers Conferences are being planned for the fall in other major cities. Details will be posted to www.insideselfstorage.com/conf.
For nearly 25 years, ISS has provided informational resources for the self-storage industry. Its educational offerings include ISS magazine, the annual Inside Self-Storage World Expo in Las Vegas, an extensive website, the ISS Store, and Self-Storage Talk, the industry's largest online community.
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The BSC Group has been voted Best of Business - Finance for five years running by the readers of Inside Self-Storage.