Interest rates are going up!
No… they’re flattening out and going down.
No, wait…they are going up.
There will be no more increases… Hold on… It looks like one more. No, make that at least two more .25% hikes.
Life can be in flux often.
But as a small buyer and developer of self-storage, what do we do?
Just step aside and wait?
That is one approach.
However, lots of good opportunities may be missed. Sure, you will be safer. For myself, doing nothing may feel safe, but I have learned that often it is not. The world passes me by.
Long-Term and Short-Term Loans
Basically, loan interest rates today are usually a spread over indexes.
Short-term loans, like construction loans, may be spread off Prime Rate or Overnight Financing Rate (SOFR).
Longer-term loans, like in the permanent market, are usually indexed off something like a 10-year swap rate or treasury indices.
Today, short-term loans are in the three to five-year ranges. Just what we value-add players need to use to create the value.
I have seen them recently from low 7s to mid 8s in interest, depending on the loan, the borrower, the deal, the lender, and the position of the stars and planets (just kidding on the last one…maybe).
If you want to see the impact of interest rates on development, let’s pick a state.
Florida.
Let’s go to the current listings today, on you pick it. I’ll choose Argus because it is easy.
I just looked. There are seven listings on the page not under contract. Five of them are development opportunities.
I know it’s too small to see (by design) but trust me, 5 out of 7 active listings are development opportunities.
Now, this is to be expected because many of these deals went under contract when interest rates were half of what they are today.
But this is a visual impact of what short-term interest rate hikes may look like.
So, today, we need to work hard on keeping our construction costs down, our project underwriting, and perhaps scopes of projects. In short, everything within our control we can impact because we have zero impact on interest rates today.
Longer-term loans, let’s say over 48 to 60 months long, can take on many forms. Banks loans, CMBS loans, Insurance Companies, etc.
I have seen mid to high 6’s here recently as well as low 7’s. Higher than they used to be, but still workable (at least for us, they are).
So, we are back to where we started. How should we navigate the swirl of the interest rate environment today?
I can tell you how I did it.
We engaged a commercial mortgage broker who is knowledgeable of the capital markets and can put a construction and “mini-perm” loan together for us.
In the past, I usually only used mortgage brokers to put the permanent loan on our deals after we completed the value-add play and wanted to refinance and cash out with a permanent loan.
Today, we are starting with them. They can be an essential part of your team.
I started with local people I know who we have used before.
If you have no idea where to find a commercial mortgage broker, I would start with the lenders and capital advisors who are members of the ISS (Inside Self Storage) or the SSA (Self-Storage Association).
They are usually the same vendors at both conventions.
These professionals can be a great resource to help navigate the choppy waters. We may get one to four loans a year. They do many, many more and can often flush out the right lender for a specific project.
We just go to our usual go to lenders.
So that is my advice on how to navigate the interest rare swirl today as we small investors get in and grow our self-storage businesses.
If you have a mortgage broker you want to recommend to the group, feel free to put their contact info in the remarks section.
Thanks again.
