April 2008

Issue 1

Current Capital Markets and Real Estate Activity

With the tremendous shift in the capital markets since mid-2007, the volume in the commercial mortgage backed securities (CMBS) market has become virtually non-existent this year.  As a result, typical debt structures have changed dramatically and directly affected storage investors’ acquisition underwriting criteria. Lenders and buyers have greatly curtailed the valuation of future growth in lease-up which has lead to an increase in in-place yields.

CAPITALIZATION RATE vs T-BILLS

* Capitalization rate trend is based on approximately $1.3 billion dollars of investment sales in which
Self Storage Group of HFF members were involved. HFF total transactions is approximately $2 billion dollars.

The Low-Down on Lending Sources

With the CMBS market having grinded to a halt, the majority of self storage debt being sourced in today’s market is through life insurance companies and banks with local, regional and national scopes.

Life insurers have been extremely active during 2008’s first-quarter and they are expected to reach their annual allocation of +/-$40 billion by the third quarter.  As a result, expect banks (which may require partial recourse on financing transactions) to become a more prevalent lending source in the second half of this year.

Because many storage owners and investors have relied solely on CMBS structures for their financing and refinancing needs in recent years you may be unfamiliar with programs available from other lending sources.  Insurers and banks offer fixed and floating rate loans with the following typical structures:

Given today’s volatile capital market environment, you should consider sourcing multiple lender quotes (as many as 25).  By doing so, you will likely capture the most attractive deal available and find a lender who not only understands the self storage industry but can also expedite your transaction in this time-sensitive environment.

On March 18, the Federal Reserve cut the federal funds rate by .75 points, which lowered the rate to 2.25%. Since its September 18, 2007 meeting when the Fed first began rate cuts, the fed funds rate has been lowered by a total of three percentage points, with additional cuts expected in the future.

While the fed funds rate is the rate banks pay to borrow from the Federal Reserve, it also affects the prime rate, which typically moves up and down in tandem with the fed funds rate and is used in many financing transactions (prime is generally three percentage points higher than fed funds rate). With CMBS lenders currently out of the financing landscape local and regional banks that are now more prominent lending sources are keeping close watch on the Fed’s actions for the corresponding prime rate effect that impacts storage loan structures.

Created and distributed by HFF Self Storage, formerly Storage Investment Advisors (SIA), MarketWatch is a monthly electronic newsletter that provides storage owners and investors with brief highlights and analyses of the latest market developments, investment real estate activity and financing news.  Our hope is that this information, interpretation and analysis will help you better understand current self storage real estate and financial conditions, and support your investment decisions.

If you have a story idea for a future issue of MarketWatch, or want to learn about a particular aspect of the self storage real estate or finance industry, let us know! Please forward your ideas and suggestions to MarketWatch Editor Minh Tran at mtran@hfflp.com or 713.376.3107.

Contact us to learn how we can assist with your disposition, acquisition, or financing needs.