Those Great Self Storage Loans

Published in PA Banker Magazine, September/October 2008 – by John Barry & Bob Francis

What’s happening in this $20 billion industry and the debt that drives it.

An old banker joke I’ve heard many times is the refrain of a banker saying, “I never made a bad loan although sometimes they turned out that way.” This quote could one day apply to The Self Storage Industry which is undergoing its own metamorphosis. This change is more dramatic in some markets than others, but clearly a defining shift from “what has been” to “what will be”.

As each geographic market for self storage matures or becomes saturated, there will be some unfortunate owners faced with difficult operating problems and they may be joined by their bankers. In some cases the sites should not have been developed in the first place but in others, the vast majority of them can benefit from the management of an experienced operator.

For nearly two decades and not without some very real success stories, the self storage business model has been predicated upon a fairly rapid fill rate and an attitude of “build it and they will come”. Developments have generally done well, and properties still in their fill up stages have sold, based on economic modeling more closely tied to pro forma statements and incomes than to actual earnings histories.

Simultaneously, the industry’s ability to support itself as a stable investment platform became increasingly popular. Wall Street began to embrace the concept and suddenly everyone seemed to be interested in the product. Investment firms dedicated substantial resources to build or buy self storage facilities. And, with an ample group of qualified buyers, publicly traded firms divested properties that were inconvenient for their management systems, or that were located in markets that they deemed tertiary while Europe, Australia and Asia became the new frontiers of opportunity.

With a scenario like this, it is hard to believe that anything could be wrong, but the harsh reality is that real estate cycles systematically correct the playing field over time.

Now the industry is beginning to feel the effects of maturity.  Many major markets have essentially reached their current levels of saturation, and the more rural and secondary markets are coming of age. These changes are the cause and effect of any real estate cycling but we feel the remedies to lenders are particularly specialized.

Within just the past few months, we have seen values declining, portfolio deals being withdrawn from the market, and increasing skepticism on the part of investors.

Deals that are closing are being modeled on the property’s actual history and sites with long-term stability are being looked on more favorably than the expansion and fill up portfolios of just a year ago. At this point, it is important to note that new construction and fill-up properties are selling and many are doing well but the deals that are and will continue to be successful are based on solid principles of real estate with regard to their location, concept and management.

Defining the problem

Weaker market conditions in many areas have slowed both occupancies and the ability to raise rents, leaving many properties without a plan. While not too damaging to fully stabilized properties sites in their fill-up periods are particularly vulnerable. Often, using an outside consultant can provide the additional management expertise to:

  • Identify the problem areas.
  • Effectively communicate the realities of the situation.
  • Create a workable and attainable plan for corrective action.
  • Implement and manage the plan through its fruition.
  • And, when necessary move the asset through sale or final disposition.

If these bullet points sound similar to a site feasibility study, it is not without good reason. Given the usually long lead time between concept and delivery of storage facilities, the core ingredients of a feasibility study often change so that when obstacles do arise, a “re-thinking” of the salient key areas is always well advised.

What to do now?

Avoid surprises! Anyone can manage a business in good times but not every one can during difficult times. Bankers should be sure that they are truly maintaining a relationship with their client, the self storage owner. Have you reviewed the financial statements of the company recently and met with the owner? Have you obtained tax returns each and every year or have you let them slip by? Know what is really going on because while they may be making their mortgage payments right now, things can change quickly next month and you do not want to be surprised with bad news.

Visit the owner and make sure the property you have a first lien upon is being properly maintained. Is there deferred maintenance or other property issues? Drive the market area for the business. Have new competitors emerged in better locations and with nicer facilities since the loan was made? What does this mean for the future?

Experienced self storage consultants, management companies and brokers who specialize solely in self storage know and understand this niche market better than generalists. In many cases, you can find all these operators under one roof and they can be a tremendous resource to help get your self storage property back on track and in the black. Markets change and this one has. Don’t find out the hard way.

Bob Francis has specialized in the operation and management of self storage facilities for over 20 years throughout the US and Canada. He is currently the Chairman of the National Self Storage Association in Washington, DC. For more information email Bob at

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