Abrupt Halt Brings Reminders of 2008 for Storage Brokers
By Laura Williams-Tracy, SSA Magazine
Self storage capital markets that were humming along nicely a mere three weeks ago face a sudden break as the coronavirus pandemic rattles investors, delays closings, upends debt markets and puts optimism on hold for those trying to lease up new facilities.
It’s a far different shock to the economy than the financial crisis of 2008, but the result is nearly the same, said Mike Mele, vice chairman and head of Cushman & Wakefield’s Self Storage Advisory Group.
“This is very reminiscent of 2008,” Mele said. “Debt markets are a disaster, to say the least, and anyone who doesn’t have a line of credit is out of cash.”
Huge questions for the industry are ahead. How will facilities fare in early lease-up? Will private equity, which surged into the industry over the last half-decade, want to cash out, even if it means meeting the market? Will owners of attractive, cash-generating properties find no good reason to sell, slowing investment activity at all levels? Where will the market land?
The self storage industry remains sturdy, but a rapid and unprecedented near-shut down of the US economy will likely influence negatively the usually recession-resilient sector.
Brokers said deals scheduled to close in the early days of nationwide social distancing were happening, albeit with brokers, title insurance representatives and attorneys working from home. County courthouses appeared to have small crews still recording deeds.
“There’s a substantial supply chain involved in closing a real estate transaction, and like other industries, our supply chain is under stress,” said Bill Bellomy, a Texas-based broker with Bellomy & Co.
Deals that are under due diligence “are dropping out left and right,” Mele said. “You can’t travel to see properties, you can’t get and appraiser or inspector to the sites, and you don’t know when that is going to be able to happen.”
Mele said he expects a last-minute surge of deals to happen and then a wait-and-see period from buyers over which time the economic news likely gets worse and worse. Meanwhile, prices drop.
“Sellers still believe their property is worth a certain number. They want $10 million and someone offers $9 million,” Mele said. “In a few months, they come back and say they’ll take the $9 and the buyer says now it’s worth $8. When these things go, they go fast.”
Despite efforts at the federal level to rush liquidity to banks, Bellomy said he has already seeing lenders tightening up.
“I’ve got 20-year relationships with some lenders and they are not calling back,” he said. “I know they are so busy with all of this, but there’s a big slowdown.”
Hugh Horne, a broker with Charmel Storage Capital in Pasadena, California, said he’s paying attention to the debt part of the capital markets more than anything.
“My speculation is individual investors or investment ventures are going to lean on their bank relationships and do less shopping in the markets,” Horne said. Like in 2008, Horne said the CMBS market may all but go away. Life insurance companies are always more conservative and will stay locked in that position.
“Storage always proves recession-resilient,” Horne said. “My guess is stabilized assets in good markets will still get interest from different capital buckets and there will be a flight to quality of asset, fundamentals and demographics.”
Brokers said they won’t be surprised when they see deals collapse.
“We had some new deals about to put on the market and had been writing up our property tours,” Bellomy said. “No one in their right mind is getting on an airplane to see a self storage facility right now.”
Lease-Up Just Got Harder
The already tough road for properties in lease-up just became tougher.
Self storage facilities thrive with long-term tenants, what Horne calls “barnacles.” They stay when other short-term renters pop in and out due to life changes.
“A lease-up facility doesn’t have those barnacle tenants yet. They are relying on that short-term tenant to become the barnacle.”
Without those tenants and fewer new tenants in the short-term, the pandemic will impact lease-ups for the next quarter, at least.
Mele said certificate of occupancy deals with no income will be extremely hard, and potential new tenants will likely see storage as a non-necessity.
Bellomy said he expects investors to make a fight to safety, which means self storage — which has a history of out-performing other asset classes, especially in a down economy.
“Facilities that are well-located with good demographics will hold up pretty well,” Bellomy said. “It’s those properties that are not as good, that are in lease-up or see declining rates that the pricing for those will probably soften.”
Before the pandemic hit the US economy, Bellomy said he was talking with clients who were soon to go to market with attractive properties. Likely not now.
“We’ve advised our sellers, if they can afford to wait, we might as well wait,” Bellomy said.
Horne said he would encourage potential sellers to pause.
“You are going to see more entitled sites on the market,” Horne said. “It will be interesting to see the appetite for those. Long-term capital we’ll return to normal, but it’s hard to imagine that selling development sites didn’t become just much more challenging.”
Mele said he’d advise potential sellers to reconsider.
“If you have a good, solid, cash-flowing property right now, why would you sell it? Where are you going to go? You’ve got something with cash coming in the door.”