Summer may be over, but the self-storage refinancing market remains hot.
On Oct. 1, JLL Capital Markets said it secured a $87 million refinancing of a portfolio of 36 self-storage facilities on behalf of West Palm Beach, FL-based self-storage investment firm SROA Capital LLC. The five-year, interest-only 3.12 percent fixed-rate package came from several banks.
A week earlier, Irvine, CA-based mortgage broker Talonvest Capital Inc. said it obtained a $123 million refinancing for a 22-facility portfolio owned by Lake Forest, IL-based Metro Self Storage LLC. The loans carry a 3.19 percent fixed interest rate with 10 years of interest-only payments.
“Robust” financing market
Lenders say these two deals exemplify a surge in refinancing activity among self-storage owners trying to capitalize on rock-bottom interest rates before they rise again. Data about this trend is hard to come by. However, Shawn Hill, principal of Chicago, IL-based The BSC Group, a mortgage broker specializing in self-storage properties, said that “with rates as low as they are, activity is robust as you might imagine.”
Adam Karnes, senior credit analyst at The BSC Group, added that with refi rates lingering below 4 percent, many self-storage owners have been motivated to consider refinancing single assets or entire portfolios.
In September, the Federal Reserve set its benchmark interest rate at 1.75 percent to 2 percent. On Oct. 8, Federal Reserve Chairman Jerome Powell suggested that another rate cut could happen sometime in October. The Fed rate applies only to bank-to-bank loans; interest rates for businesses and consumers are higher.
Amid the low-interest environment, Kim Bishop, senior relationship manager at Talonvest, says she’s noticed an uptick in self-storage refinancing deals over the past 90 to 120 days.
“That refi activity includes borrowers who have been willing to pay defeasance costs, sometimes significant amounts, on existing CMBS loans to take advantage of the current extremely low rates and full-term, interest-only payment structures that are available in the market today,” Bishop says.
Locking in favorable rates
According to Bishop, Talonvest has negotiated refi loans from insurance companies and CMBS lenders with fixed rates in the low 3 percent range for 10-year periods, while it has structured five-year refi loans with rates below 3 percent.
“While paying off bridge loans and construction loans funded two to five years ago is a part of the refinance volume, the current low-interest-rate environment is likely the most significant driver of the refinance activity,” Bishop said. “Clients want to lock in a favorable rate for 10 years.”
As long as interest rates continue to be favorable, Bishop anticipates demand for permanent lending in self-storage will stay strong. She noted that Talonvest also is seeing greater interest in bridge and float-to-fix loans for new facilities in the early lease-up phase.
“Very good time” for financing
Griffin Guthneck, senior vice president of JLL, represented SROA Capital in its recent refinancing deal. In the refi arena, self-storage owners with a long-term-hold strategy want to take advantage of historically low interest rates, Guthneck said. Meanwhile, he added, value-add buyers are embracing creative floating-rate lending mechanisms by latching onto the LIBOR futures curve. LIBOR is a benchmark interest rate.
“We are at historically low interest rates and historically high levels of liquidity in the self-storage debt world,” he said. “It’s a very good time for a storage owner-operator to be financing.”
In general, Guthneck described the self-storage capital market as “diligently aggressive.”
“Self-storage is still considered an alternative property type and, as a result, numerous institutional lenders don’t have an appetite for self-storage exposure,” he said. “Although there is currently more debt capital available than ever, it’s still important to be informed and in the market daily to find the [best lending terms].”