Self-storage property owners and investors have enjoyed a long run-of historically low interest rates. Recent Fed hikes, along with views that there are more increases ahead, have kicked off a fresh wave of refinancing activity.
“We’re seeing more activity now because everyone is concerned about where rates are going,” said Michael Balan, a vice president in the Miami office of Charlotte-based Grandbridge Real Estate Capital, a subsidiary of Branch Banking and Trust Company (BB&T) bank.
Grandbridge recently closed on a $44.5 million refinancing for Storage Rentals of America. The new 10-year loan is secured by an eight-property, 4,400-unit, self-storage portfolio in Wilmington, Delaware. Grandbridge arranged the permanent, fixed rate loan through its proprietary lending platform BB&T Real Estate Funding.
The Federal Reserve introduced one quarter point rate increase in December and a second on March 15th. The Fed could introduce two additional rate hikes this year. The perception is that if the Fed keeps raising short-term rates then there is a correlation with the long-term rates also rising, Balan said.
Long-term permanent financing is priced off the yield on 10-year Treasury bonds. However, the Fed’s move to raise rates is spurring more refinancing activity from operators who want to get long-term rates locked as quickly as they can, he added. Although the 10-year Treasury has declined since the start of the year to 2.24% as of April 20th, it is about 65 basis points higher compared to 1.63% at the start of October.
Although many borrower have already prepaid loans or sold properties prior to maturity, there is still a large amount of maturing debt driving transaction activity, said Shawn R. Hill, a principal at The BSC Group in Chicago.
The firm has closed over $100 million in loans year-to-date through mid-April. Another factor contributing to increased refinancing is the mature phase of the market cycle. Owners see it as an ideal time to refinance at what could be values that are at or near the top of the market.
Lenders remain aggressive
Capital is still readily available for refinancing both one-off and properties and larger portfolio deals. All sources of capital are currently lending, including CMBS, banks, life companies, credit unions, the SBA and private capital.
“Permanent debt lenders are as aggressive as ever and the rate environment is very favorable for borrowers as of today,” said Hill.
However, there are some global risks that are emerging with overseas military conflict and geopolitical risk, which could negatively impact the credit markets if they escalate, he adds.
Banks have talked themselves out of financing on many different property types at this stage of the cycle, including retail, multifamily, office and hotels.
“As they check off these property types that they are worried about and don’t want to lend into, the darling is industrial,” said Balan.
Self-storage is often viewed as a subset of industrial, and banks still like the fundamentals of self-storage and are being aggressive in providing capital to that sector, he adds.
Grandbridge also has a platform of small life companies that do very small loans down to as low as $1 million.
“Those life company lenders are very handy when it comes to some of these rural mom-and-pop self-storage facilities in smaller tertiary markets,” said Balan.
It works out well, because those life companies provide long-term fixed rate loans that the banks often can’t do, he adds.
CMBS lenders return
CMBS loans have come back in favor with borrowers thanks in part to spreads that have been narrowing over the past six months as that market has gotten comfortable with new risk retention rules.
The CMBS market also is very good at “cashing out” borrowers, says Hill. So, those with maturing debt have the option to take substantial equity out of their properties on a tax-free basis to use for other purposes, such as expansion, renovation or new development, he adds.
The BSC Group recently helped to secure financing on a $15 million loan for a single asset self-storage property in Southern California. The expectation was that a life company would win the deal, due to the low leverage nature of the request and the very high quality of the asset, notes Hill.
“Surprisingly, the CMBS market outbid the life companies and offered a 10-year, interest-only structure at a very low coupon,” Hill said.
That deals shows how extremely aggressive CMBS lenders are willing to be for larger, low leverage storage assets, he adds.