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Capital Markets Competition Heats Up for Texas Properties

Apr 12, 2013

by Michael Laurencelle, Marcus & Millichap  (Guest blogger)

If there is one phrase that best summarizes the temperature of the capital markets when it comes to investing in self-storage facilities, it is this: “They are on fire.”

In recent months, the self-storage sector has become a prime target for lenders across the country, and the Texas market, in particular, has taken its rightful place among the most prized. Lenders are recognizing that self-storage facilities in Texas are achieving the best occupancy levels in the nation. The market has corrected itself to some extent, with rental rates rising and commercial real estate in general generating more net operating income. These solid fundamentals provide lenders with viable opportunities to achieve steady and relatively high returns compared to other asset classes and property sectors.

This state of play has led to significantly increased competition among lenders to do deals. However, it does not mean that lenders have loosened their lending standards or criteria. As a group, they learned a number of lessons from the recent Great Recession, and are none too eager to repeat their mistakes. While lenders are still being somewhat stingy when it comes to their underwriting, owners of self-storage facilities that are well-located, feature high occupancy and are in good condition are commanding more attention than at any point in the past five years.

Of particular note, the commercial mortgage-backed securities (CMBS) lenders have returned to the market in a big way. Prior to 2007, CMBS lenders were the dominant financing source in the self-storage sector, and they made their renewed presence felt in 2012. They are once again among the most active lenders across all property types, including self-storage, in the early part of 2013. This trend bodes well for the rest of the year, and lenders continue to signal they are ready to do even more financing in the months ahead.

Several new lenders have appeared on the scene. In particular, two new CMBS players have come to the market and are willing to do deals priced slightly above bank rates but lower than bridge lender rates. These involve loan-to-values (LTVs) of 75 percent to 80 percent.

Today, the average LTV for purchase or refinance is roughly 75 percent, while the average loan to cost for construction projects is 70%-75%. This compares favorably to previous LTVs of 70% for purchase and 65%-70% on construction.

In response to the renewed competition from CMBS lenders, there are signs that local and national commercial banks, life insurance companies and private equity players are more willing to bend when it comes to loan terms, and lenders are getting more comfortable as they see more financing opportunities.

While measuring markets based on cap rates is often a risky business, since not all cap rates are created equal, average cap rates in the largest Texas metro areas have been ranging between 6.5% and 8.5%. In more tertiary markets, we have seen cap rates in the high-7% range, but they are averaging in the 8%-9.5% range.

Overall, more loans are being approved compared to 2009 and 2010, as many lenders have worked through their real estate-owned (REO) issues and now are looking for new exposure, even in secondary and tertiary markets. Deals are getting done in Midland-Odessa, Corpus Christi, Harlingen and College Station. The market is correcting itself and lenders are trying to get more money out to the market to make more money.

Self-storage has become one of the hottest investment sectors due to a major change in lenders’ mindsets over the last 10 years. Their old misperceptions are quickly fading away, as it is more common to see downtown self-storage facilities that have been upgraded to look more like retail centers. It is amazing to see the recent sale of a self-storage facility in downtown New York for a 5.6% cap rate. From the CMBS lenders’ perspective, self-storage loans also produced the lowest number of defaults during the most recent financial crisis.

Sellers include families and private owners who have built a solid track record of success and may be ready to retire. The main buyer pool for Texas self-storage facilities includes the top 100 owners and operators in the country, as the largest are looking to get larger. The four major self-storage REITs, for example, are also actively pursuing prime properties across the country.

Buyers are looking to Texas because self-storage properties here have a higher occupancy rate than in any other state. It is a good place to live and do business, and there is more self-storage property here than in any other state. There are also potential turnaround opportunities to upgrade and significantly increase NOI on many existing properties.

Michael Laurencelle is an associate director in Marcus & Millichap Capital Corp.’s Austin office. Contact him at    or (512) 338-7800.


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