There are so many questions about investing in the current self-storage market. Should I surge forward with all the deals that are being presented to me right now while the interest rates are low? Should I sit on my cash and wait for the looming recession to get worse? Will there be better deals as we get to the deepest parts of the recession? Or, should I invest in a new development project because of the great opportunities there are to get cheap money?
Growth stocks and stock and bond funds are at the top of the list of possible long-term investments. However, your savings account, checking account or a money market account are at the top of the list for short term investments.
There are many places to put your money that are great opportunities for solid investments. In terms of the stock market, we had a little dip at the beginning of Covid-19, but the stock market immediately rebounded and so a lot of people headed back to the stock market. And since then, wars, Inflation, an election, along with many other factors have caused people to pull their money out of the stock market and they are just sitting on the sidelines looking for a safe place to put that money.
We also find ourselves in a time where there are a lot of people who have lost their jobs or who have been downsized. Many of these people are sitting on 401k money that they can now convert into a self-directed IRA because they are no longer working for an employer. There is more money that is sitting on the sidelines waiting to be invested than there used to be.
We are going to talk about how to invest a lot of that money in self-storage and what you should consider when you look at self- storage investments. You should know that there are many people actively looking for self-storage properties. There are a lot of passive investors who are interested in getting into self-storage facilities. There are also a lot of people who are waiting on the sidelines for the looming recession to produce distressed facilities.
As we head into a time where bank loans are harder to come by and some self-storage owner operators haven’t done well or haven’t created value in their properties, they are not going to be able to refinance when the time comes. Banks are offering less than generous terms in today’s environment. The loan to value, LTV, ratio is lower, debt service coverage ratios are higher, and banks are sharpening their pencils when it comes to underwriting these types of facilities. An owner that is expecting to refinance their current 80% LTV loan and replace it with another 80% LTV loan may have a rude awakening. As a result, some of these facilities will be coming on the market and many investors are banking on that.
Another thing to consider is that we have historic lows as far as current interest rates. There are people who are refinancing their portfolios into these lower interest rates and so opportunities that didn’t work in the past will work today because the cost of capital has gone down. So, the question remains, should you be bullish on self-storage right now given the environment that we are in? Many people think that we are currently in the perfect storm for investing in real estate because many existing owners are now listing their facilities because they cannot refinance them. There are many owners that are afraid of the looming recession, or afraid of the next wave of the pandemic so they are looking to sell their self-storage facilities.
Or, do you find yourself in the camp where you want to go deeper into the recession where there will be a higher unemployment rate and foreclosures are more prevalent? Foreclosure activity may increase because there are many self-storage owners who have diversified their assets into other asset classes. As those assets become distressed because of the pandemic and the deepening recession, many of those properties may end up wrapped up in foreclosure or even bankruptcy. Some investors may find that they are forced to sell their self-storage properties because they have fallen on hard times in those other investment areas.
We saw a pause in self-storage development projects at the beginning of Covid-19, and then again when interest rates spiked in 2022. Now, banks are lending again because self-storage does well in a recession and banks are interested in strengthening their balance sheets. Because of this, banks are adding self-storage facilities or properties in this asset class to their balance sheets to bolster their holdings as we continue further into the recession.
Insurance companies are underwriting more loans in the self-storage space for the same reasons. They know that self-storage performs extremely well. They want in on this game because they know that it is a solid bet. Numerous new hedge funds and family office resources are pouring money into the self-storage asset class. Because of this, there is more competition for those properties.
Some developers are playing the wait and see game because they are wondering what the banks are going to do with reserve requirements and other loan stipulations. Stipulations that were easy to overlook prior to the pandemic are making it more difficult to get projects underwritten in today’s market.
So, for this investor, we have revitalized some of our development projects that we had previously hit the pause button on because capital is so cheap. We are very bullish about purchasing new or existing facilities that are distressed or that may have the potential for a value add. We are also syndicating most of our projects and taking advantage of the perfect storm we find ourselves in. The interest rates are low and there are many passive investors who want to get in on the projects we are working on. We are combining the two types of financing together on projects that financially make sense.
Any type of market produces good opportunities, you just have to know where to look and how to take advantage of the financial opportunities that are available in that market. Happy Investing.