How Do the Capital Markets View Self Storage Compared to the Rest of the Commercial Real Estate

As self-storage brokers, we spend most of our time in the primary markets throughout Texas, but one of the interesting things that we have seen, and we have kind of touched on some of this relative to the capital markets, is an interest in secondary markets. We recently closed a portfolio out in the Permian, in West Texas, not too long ago. This was a unique transaction in the sense that the asset quality was high across the board. There was a demonstrable cashflow that had been very predictable for a number of years, but, as many folks who invest and live in Texas, we understand that the Permian is severely influenced by the global oil and gas industry.

So we had an investor with a highly-rated experience in that particular market, and they used some conventional portfolio lending to get the deal done. What are you guys seeing now that we are talking a little bit about storage, particularly, what are you all seeing from a leverage standpoint for storage assets that have been performing well over the years? Is it still going to be in the 60 to 65 range and maybe higher-leverage for conventional financing?

From the banks, it is going to be very sponsor-driven. Sponsors, as we all know, there are big institutional sponsors, there are sponsors that have their own management companies, that have real time data that can support adding on another asset within their portfolio pretty easily. Those types of sponsors are a little bit higher leverage, if they want that higher leverage, whether it is from the banks or the CDBS market. It also depends on whether they are stabilized, a value-add, or a construction deal.

As much as the market, as much as the product type matters, we have got to focus on sponsors just as much. The CDBS market, as mentioned before, currently is kind of in that 65% range to finance a deal, but we feel like, with more product coming out and the liquidity starting to open up and more lenders coming out, that leverage point will go up back to the 70, 75% arena that it was in order to compete with what the banks are doing.

East Texas is analogous, in many ways, to Killeen or Waco or even some of the West Texas markets, such as Lubbock and even Midland/Odessa, to some extent. What were the challenges about doing that deal from the capital markets side? When do we expect those properties will be closing, and how long have we been in that process, since it is all happening right when COVID reared its ugly head?

We had a three-property portfolio that we brought to market out in Tyler and Longview, and we really started marketing right as everything started shutting down in Texas, but that really did not scare off many of our investors. We had both first-time mom and pops and some of the kind of tier two trending more towards the institutional type investors interested in the asset, and we put the deal under contract right under our asking price.

So really the only reason why the transaction has been taking a little bit longer to get to the finish line, it does not have anything to do with financing, it has to do with the fact that our seller actually has a fourth property that we decided to include into the portfolio after we were in escrow. On the financing side of things, our buyers were thrilled to get a quote sub 4%, and they have got extra to do some capex work that has been deferred for a number of years, so we are expecting to close on that next month in July.

So the next question is: Is that financing?

And the answer is yes, it is. They do not like recourse, like we mentioned some folks do not, but they got a very attractive quote on that. They are even happier than they were when they went under contract.

That is a great example of a success story where there is a quality. Lenders that had either an existing relationship with a borrower or wanting to lend in certain product types, they will get aggressive in order to land into, lets say, a self-storage portfolio. When we go out to the market, we will go out to multiple lenders, and we will take data points from those multiple lenders on what product type that they are looking for. We will look in our database and see that XYZ lender is looking to get aggressive on self-storage, that is the person that we would want to talk to almost immediately, because they are looking to diversify their loan portfolios away from some of the product types that are struggling into self-storage assets.