Real Estate Forum - April 2013

NEWS FRONT
Talking SoCal Self Storage With JLL’s McCarron

LOS ANGELES—In the search for higher yields, investors are taking a closer look at niche sectors such as self storage. To gauge where the market is at present, Real Estate Forum recently spoke with Doug McCarron, managing director of Jones Lang LaSalle’s national self storage team. An edited version of that conversation appears below.

Real Estate Forum: Which Southern
California markets are self storage investors
most interested in and why?
Doug McCarron: Institutional investors
are focused primarily in core urban mar-
kets; these markets would include Los
Angeles, Orange County and San Diego.
The attraction to these markets is due to
the following factors: how these markets
performed during the downturn, the
amount of density/population in these
areas, the aggressive debt/equity capital
available, as well as the large amount of
discretionary income. The Inland Empire
is starting to rebound, however we are see-
ing mostly private capital in this area on
one-off acquisitions. However, institutions
will move into the Inland Empire for
larger one-off transactions, in excess of $5
million and portfolio opportunities in
excess of $10 million.
Forum: What types of returns can self storage
investors expect in today’s market and how
does this compare to the past five years?
McCarron: Returns in core urban markets
are at or exceeding what we witnessed in
the peak of 2006/2007. Day-one yields for
core product can reach levels at or below
6%. Most investors today are targeting
core markets and focusing on the year-two
unlevered cash-on-cash return, thus allow-
ing investors to pay a lower day-one cap
rate by modeling in upside. This upside
can be achieved through economies of
scale, increasing rates on existing tenants
and sophisticated revenue management
techniques. If you move up the risk curve
to secondary and tertiary markets, the
day-one yields can increase anywhere from
100 to 250 basis points when compared to
core yields.
Forum: Why are Southern California self-
storage properties so exciting for investors?
McCarron: Self-storage properties here
rarely trade because of how well the mar-
ket performs. The lack of basements,
population density, availability of capital,
and the large number of multifamily prod-
uct are all factors that contribute to the
excellent performance in the region.
Rental rates are generally above average,
the weather is mild and the disposable
income in these markets is extremely
high. These factors all contribute to future
growth opportunities that can be achieved
by consistently increasing street rates as
well as rates on existing tenants.
Forum: What types of buyers are most inter-
ested in these facilities? Who are most active?
McCarron: The REITs within the self stor-
age space are all vying for product in core
areas within the region. There are also a
number of larger private investors with
established portfolios looking to increase
their footprint. From a debt and equity
perspective, a large number of national
equity providers and large banks are all
competing to place capital in the
marketplace.—Interview by Natalie Dolce ◆

Financing Needs a Solid Turnaround Story

The Golden Globe-winning movie The Player features Tim Robbins as a studio executive whose sole responsibility is to comb through a constant onslaught of feature film script pitches, hitch his wagon to the next big blockbuster and steer clear of the dreaded box office bomb. His role is not dissimilar to what today’s bridge lenders looking for top-tier value-add opportunities do daily—review scripts (business plans) for strong turnaround stories in a unique location (a signalized intersection in a densely populated submarket is preferred). The cast of characters (major credit tenants at below market rents) and the plot (the more predictable, the better) are both of paramount importance.

In an environment where interest rates and yields are low, the appetite of capital providers for bridge loans on properties in transition is high because bridge returns are often double those of term loans. A bridge loan scenario, while often weak on current cash flow, compels with capable sponsorship, property function-ality, location viability and market trends. With the premium for bridge lenders, accepting a level of uncertainty is attractive in a currently yield-starved market.

Handsome returns, coupled with recovery in several metropolitan regions in the western US, have led to aggressive competition among capital providers active in this region. The result is tighter pricing and/or increased leverage, both bearing well for borrowers. While bridge lenders stretch to meet demand, borrowers should expect lenders, especially those offering non-recourse, to be thorough in their due diligence. After all, lenders understand that a full payoff is As Good as It Gets and it takes just one flop (think Catwoman) to negatively offset several performing loans.

The A-list borrower will appreciate the lender’s perspective and provide a repositioning story with line-item detail for anticipated cost assumptions, projected rents, expenses, timing, and, most importantly, ultimate value. Lenders favor borrowers with superior relationships and property sector and market knowledge, as well as a track record of translating these into tangible value. Lastly, while banks prefer the “Tom Cruise” of borrowers, non-bank bridge lenders are content with players who are strong on expertise/execution, with the financial capability to carry a project through bumps in the road.

Expect bridge financing to fuel the commercial real estate recovery in the west this year. It serves today’s borrowers and lenders to understand the key components of a compelling turnaround story. A great “script” is what ensures that a property gets financed and becomes a blockbuster success.

By Jim Martin

Jim Martin is director of Sabal Financial’s commercial bridge lending program. He may be contacted at jim.martin@sabalfin.com. The views expressed here are the author’s own.