It’s Special.
That’s the feeling I get every time I go to The Self Storage Association Fall Show. Even in 2023 when the challenges the industry are facing were at their peak (at least I hope it was the peak) the energy at the conference is positive.
This year was no different as you could see a pep in the step of everyone walking through the long hallway from the hotel rooms of the MGM Grand out to the Convention Center (random side note, it’s hard not to get 20,000 steps in a day when you go to SSA).
A few serious takeaways from the event.
The first is there seems to be some movement happening with money again.
Everyone knows that debt and equity have been extremely challenging over the last couple years. Between the most aggressive rate hikes in my lifetime (granted on the back of the lowest rates we’ve ever seen) and the closing of Signature and SVP, developers were faced with interest rates nearly double what they had projected.
Maybe even more challenging was the drastic drop in LTC (Loan to Cost) and how the change in interest rates made it impossible in many cases for projects to meet DSCR (Debt Service Coverage Ratio) requirements. It was a double whammy as many banks drastically increased the ratio they required for coverage, while at the same time the rising interest rate drastically reduced the total amount of a mortgage that would be available even without the hike.
That has seen many development projects sit idle over the last couple of years. Especially those underwritten from 2020 into early 2022, when the Covid Boom and low interest rates made far more projects viable.
The second challenge coincided with gathering Debt and Equity was the changing landscape of rate data. I was at the Investor Forum in January hosted by the New York Self Storage Association. The five public REIT’s took the stage and stated emphatically their process of lowering web rates to entice customers and relying on ECRI’s (Existing Customer Rate Increases) to get to a manageable realized rate was here to stay. Public, Extra, Cube, NSA and UHaul all said they have seen little to no customer push back based on the practice.
That leaves developers in a quandary. We rely on those customer facing rates to get a decent read on performance in a market. Now if Extra or Cube is advertising a $90 10×10 Climate Controlled Unit as a Web Rate with an advertised in Store Rate of $180, we have no real idea if either of those numbers is anything like what the average tenant is paying across the NRSF (Net Rentable Square Footage) of the store.
This makes it nearly impossible to put together a Pro Forma for a bank or equity partner to go get financing.
We’ve seen an increase in the cost of construction debt. A general lowering of customer facing rates, and an increase in building costs.
This means the number of markets that work for new development has been cut dramatically.
Whereas in 2021 I was looking for $169/month for a 10×10 in local stores to feel comfortable, I am now looking for closer to $210. And there simply aren’t that many markets to support that number.
To be continued. . . .