SSA Fall 2024: Key Takeaways

Written by Ryan McGuire, Analyst

1. Lender Understanding is Critical for Success:

A key theme Largo continues to observe is the importance of working with lenders who understand the unique needs of self-storage projects. This is especially true during the construction and lease-up phases. Many standard construction loan programs don’t provide a long enough interest-only (I/O) period to ensure full stabilization, which can hurt a project’s financial success. If the I/O period is too short, borrowers may be forced to turn to expensive bridge loans when it’s time to refinance. It’s crucial to partner with lenders who offer flexible terms that align with the longer timelines of self-storage deals.

2. Shift in Demand – From Construction to Refinance:

Recently, there’s been a market shift. The focus has moved from new construction to refinancing. The current economic climate, along with higher interest rates, has slowed new builds. Borrowers are now more cautious, with many seeking to refinance existing facilities to capitalize on their built-up equity.

3. All Eyes on the Fed:

The Federal Reserve’s interest rate decision has been a hot topic this year. Many borrowers have been holding off on refinances or acquisitions, hoping for a rate cut during the Fed’s September meeting. While short-term borrowing rates have decreased, 5- and 10-year treasury yields remain in the mid-to-high 3’s, keeping permanent rates in the 5.00-6.50% range.

4. Non-Recourse Loans – A Borrower’s Best Friend:

Non-recourse financing is highly sought after by self-storage investors who want to minimize personal financial risk. Some borrowers were unaware that this option is available through lower-leverage transactions with life insurance companies or through conduit lenders offering higher-leverage options.

5. Life Companies – The Competitive Advantage:

An often-overlooked but important insight is that life insurance companies offer some of the most competitive loan programs in the market. Life insurance companies provide lower spreads, better rates, longer terms, and flexible structures that can be more appealing than traditional lenders. Surprisingly, many self-storage facility owners are unaware of how competitive life insurance companies have become, making this an essential takeaway for anyone seeking favorable financing.