Class A

Located in a Top 50 Metropolitan Statistical Area (MSA). The market has high barriers to entry, either through lack of developable land or a lengthy entitlement process. Generally newer facilities, in good condition and with state-of-the-art amenities, including climate- controlled units and secured facilities. Professional onsite and off-site management. Minimum size of approximately 60,000 sq.ft., with a favorable location that allows access and attracts tenants willing to pay rents in the upper percentile of the market.

Class B

Located in a top 100 MSA. The subject market has typical barriers to entry. Generally built in the 1980s, in average to good condition with amenities typical for its market including secured facilities with gated access. Full-time onsite and off-site management. The minimum size is typically 40,000 sq.ft.

Class C 

Either located in a secondary or tertiary market. Generally constructed in the 1970s or 1980s and in average to fair condition. Owner-managed or no onsite management. May or may not have typical amenities, such as gated access, security cameras and/or climate-controlled units. May or may not have secondary access with average to fair visibility. 
 

Non-Climate Control

Non-climate controlled self-storage is the most popular, widely available, and affordable type of self-storage. Like the name implies the temperature inside the storage unit will likely be the same as the temperature outside.
 

Climate Control

Climate Control Self Storage is a type of storage unit where the temperature inside of the unit consistently stays between the temperatures of 55 and 80 degrees. Climate control units greatly reduce the risks related to mold, mildew, rust, and corrosion.  

Portable Container Storage

Businesses such as PODS offer this type of storage. Pods delivers a container to your home or business.  Once filled, you call them back to pick it up and they store it in their warehouses. The type of space associated with this form of storage rental is non- climate control. 
 

The proximity to major highways and high traffic locations, desirable residential neighborhoods located within a 3-mile radius, and commercial businesses and retailers is important to the success of a self-storage site. 

The lender needs to determine the average daily travel (ADT) on the primary roadway’s that service the site. ADT is the total traffic volume during a given period, ranging from 2 to 364 consecutive days, divided by the number of days in that period, and expressed in vehicles per day. The higher the ADT for a commercial site, the greater the visibility to attract potential clients. ADT information is available in Costar, the appraisal, or a feasibility study if the project is new construction. 

Visibility and frontage are both important in attracting tenants as visibility, frontage, and unobstructed signage along with strong curb appeal are critical to achieving lease up and maintaining lower vacancy rates.

A lender needs to evaluate the ease of getting to the site. Easy access is particularly important in areas experiencing major growth. Highly congested areas can be detrimental to the success of any commercial property. Traffic lights will help with the congestion and are preferred over curb cuts. 
 

When evaluating the site, the lender needs to review the permitting reports published by the county and city to determine if any new road construction has been permitted near the site. The Department of Transportation (DOT) and other public authorities are continuously upgrading the road systems. A major road expansion or detour can have a negative impact on occupancy and a property’s operating performance. Inversely, road expansions or changes to traffic patterns can enhance a property’s location. Examples of this is the addition of a service road or a traffic light.
 

Verify legal access to the property through:

• Visual inspection
• Review of a survey, and 
• Review of title work.

Confirm the availability of public utilities to the site to include water, sewer, and electric.

A level site is more likely to provide for a higher amount of commercial density, lower costs related to stormwater management, and less drainage and fewer flood concerns.

Evaluate the site for potential environmental constraints or contamination.

• A lender’s on-site inspection should look for potential wetlands (for example: standing water, low areas, types of tree growth), dead vegetation, unidentifiable debris or abandoned equipment/ autos/tractors/fuel tank (operable or inoperable), homes or buildings, endangered species (for example: gopher turtles), indications of past use related to farming, dry-cleaning, manufacturing, railroads and processing facilities, waste dump sites, defense or military operations, and mines. 
  • Read and review the Environmental Risk Management Policy.

Drive around to identify any off-site properties within a 1-mile radius that could have the potential to contaminate or could have already contaminated the site you are considering financing. It is quite common for a property to become contaminated through the migration of contaminants from offsite properties.

Obtaining a Phase I Site Assessment performed by a qualified engineer will identify any potential Recognizable Environmental Conditions (REC’s).

If the property is located within a designated special flood area, evaluate the impacts that a weather event could have on your property’s cash flow, borrower, and collateral. Identify ways the Bank can mitigate its credit risk and decision the loan accordingly.

Within the state of Florida, our business clients are challenged by the constant turnover in insurance providers and rising insurance costs. A lender needs to understand what impacts there may be to a property’s cash flow if CCB has to place forced-placed insurance on the loan.

Confirm that your site has the appropriate zoning and future land use designation for the intended use. In addition, review the local permitting reports to determine if any new self- storage sites have been permitted within your property’s defined market area which is typically a 3-mile radius. The permit review will give you an indication of the growth trends within the immediate area as well as give you critical information in projecting the absorption period for the new space being introduced into the market.

Survey the competition within a 3-mile trade area to verify that the borrower’s pricing projections are consistent with the borrower’s competition, evaluate the age and condition of the competitive set, the adequacy of the amenities at each site, and overall management profile.

A lender should understand who the self-storage project is targeting demographically and verify through CoStar that the submarket supports the borrower’s projections. Key demographic trends that a lender should review include:

• Change in number of households (should be upward)
• Population trends and forecasts (increasing or declining)
• Housing Prices and housing permits (increasing)
• Employment trends (unemployment rate stable or declining)
• Permits for new self-storage space 
• Growth in the market and the project’s proximity to businesses that have high demand for self-storage space which include:
  • Contractors (general, electrical, plumbing, carpenters) 
  • E-Commerce businesses
  • Legal and Medical professionals
     

Evaluate the land costs, soft costs and cost of improvements and confirm that they fall within industry standards. The appraiser can confirm that the projected cost fall within industry standards based on the construction quality and proposed improvements.

A construction design that includes multi-floor units often increases the density and revenue opportunity without elevating the land costs. Also, the higher the % of climate control the higher the costs to build and operate the project. Industry specialists estimate that the added costs for the construction of climate control space versus non-climate control facilities is 15%. 
 

Evaluate the age of the property, the quality of signage, the condition of the sidewalks and parking, the cleanliness of the site, confirm handicap accessibility, and assess the quality of the lighting. Features such as gated access, keypad or password entry, 24/7 hours availability, and modern security systems that include cameras and video surveillance are critical to attracting and maintaining a quality tenant, higher occupancies, and higher rental rates. 

Assess the percentage of climate controlled space versus non-climate, the unit mix based on unit size, adequacy of fire sprinkler systems, age of HVAC and electrical systems, condition of the improvements and note any deferred maintenance items. Undercapitalized properties may neglect maintenance needs when cash flows are inadequate which may impact occupancy levels negatively.

Note the type of construction and quality of the building improvements and the age and condition of the roof system and exterior walls.

According to Storage Café, a 10 x 10 (100 ft.) is the unit size with the highest demand nationally followed by the 5x10 which has the second highest. The size unit with the lowest demand is reported as the 10x30.  When evaluating the unit mix, the lender needs to look at the demographics within a 3-mile radius (trade area) and the project’s proximity to commercial businesses, multifamily housing, and residential single-family housing. Understanding the trade areas profile is vitally important in assessing:

• Who the likely tenant will be 
• Does the proposed unit mix support that tenant profile 
• Are the planned amenities suitable for the tenant profile.  

Example 1

If a developer is building a 40,000 sq. ft. self-storage facility near Florida State University, they would design the facility to have a higher percentage of smaller units (5x5, 5x10, or 10x10) and a higher percentage of climate controlled space. Demographically the resident living within a 3-mile radius of FSU, or any university for that matter, is likely to be 30 years of age or younger, a college student, single, and a renter occupying multifamily housing. The demand for that profile is for smaller space and the projected occupancy period shorter term.

Example 2

If your client is purchasing a self-storage facility situated near an industrial park, a lender would expect to see a higher weighting toward larger units. Due to the presence of the industrial park, there will be a higher percentage of businesses, contractors, and manufacturing companies located within the 3-mile trade area. The tenant profile at this location will demand a larger area of space, a mix of non-climate and climate controlled space and occupy the unit for a longer period of time.
 

National Unit Preference based on size per Storage Café 2023

 

A lender needs to to evaluate both the national and local trends and forecasts for the self-storage sector. In researching the performance of properties within the CRE sector over the last three years, the self-storage asset class has achieved significant growth. Often lauded by commercial real estate professionals as a recession resistant industry due to its tenant diversity and lower operating costs, the fundamentals of this asset class remain positive for the industry with a reported 2 billion sq. ft. of self-storage space spread over 51,206 facilities within the U.S. according to the Self-Storage Almanac (2023). Below is a list of economic changes impacting the industry in 2023.

• Both the post pandemic transition to remote/hybrid work and inflationary pressures have led tech companies, retailers, manufacturers, and small business owners to downsize. A component of downsizing is shuttering office space, retail locations, plants, and eliminating jobs. Some of these ill effects occurring within the economy have a positive impact on the self-storage industry. Businesses will need to store equipment, furniture, inventory, and files. 

• Covid-19 has spurred early retirements from a larger number of the Baby Boomer’s than forecasted.  Retirements often lead to household downsizing which inadvertently has a positive impact on the demand for self-storage space.

• Higher interest rates are slowing new development, especially for highly leveraged developers. Slower development could prove to be positive for the industry. According to Storage Café, of the total sq. ft. of self-storage space available in the U.S., 15% has been built within the last 5 years. This percentage doesn’t account for the additional 52 million sq. ft. in the pipeline scheduled to hit the market in 2023.

• The increasing supply of self-storage space nationally has led to a decline in self-storage rental rates in 2023 as reported by Storage Café and depicted below.

Self-storage Unit Prices
Climate-Controlled	Non-Climate Controlled
Lender's should carefully evaluate the rental rate trends and occupancy trends within a property's trade area. Dated properties with a limited amenity package will likely suffer as the supply of modern inventory increases.

• Self-storage has a broad customer base, which offers an unusual level of stability. During financially healthy economic times consumers and businesses acquire more material goods of which those items must be stored. During the tougher economic times the opposite occurs. Consumers and businesses downsize which drives up the need for storage space.
  
   
• The cost of building a self-storage facility has increased significantly over the last several years primarily driven by higher steel prices, longer construction periods (heavily influenced by supply chain issues), higher labor costs(minimum wage mandates), and higher land costs.  

Obtain the occupancy and rental rate trends within the trade area where the project is located. Sources who track industry trends and property analytics can be utilized to obtain this information including:

• Local appraisers
• Local commercial real estate brokers
• CoStar
• National online marketplace vendors (for example: Storage Café)

For obtaining market and competitive property information, lenders are encouraged to visit Storage Café.com. Enter the zip code, neighborhood, or city where the property is located and the site provides a map of the competing self-storage facilities within the desired trade area, and details for each property including the amenities and asking rental rates by unit type.  The rental information is helpful when preparing an internal cash flow analysis when submitting a new loan request to Credit Administration. 

Below is an example of the market data available through Storage Café for self- storage properties located within the 32308 area code in Tallahassee, Florida.

Market Rents for 32308 Area Code

In addition to property data, Storage Café.com provides the self-storage industry trends both nationally and locally for properties located within the larger Metropolitan Statistical Areas (MSA).

• Actual Occupancy - the percentage of units occupied
• Economic Occupancy - the amount of income being collected as a percentage of 100% of the gross potential income

As noted earlier, Costar is another great source for obtaining detailed information about an existing self-storage property as well as current market reports related to the asset class. Please note when researching information in CoStar, self-storage properties will be located within the Specialty category and not within the Industrial category.

For lenders who do not have access to CoStar, contact Credit Administration and a credit analyst will be able to assist you in obtaining the information. 

If professionally managed, review the terms and conditions of the Management Agreement and integrate the related expenses in your cash flow projections. 

Research the management company, read client reviews online, and note the company’s experience in managing self-storage properties. 

The ability for the company to effectively manage the relationship with the tenants, rental rates, occupancies, and employ sound property maintenance practices are critical to the property sustaining positive cash flow performance during the life of the loan. 

The top 5 self-storage owners in the U.S. have been listed below. Not only do these public companies own self-storage properties but they also provide third party management services for privately owned self-storage properties. Because a facility has Cube Smart signage, it doesn’t necessarily mean that the property is owned by Cube Smart. 

When CCB finances a self-storage facility privately owned but managed by one of the name brands noted above, the Bank considers the management structure as a credit enhancement. 

The advantages to brand management are as follows:

• The companies have sophisticated revenue management systems with refined pricing models designed to generate more revenue per square foot than other third-party management companies.
• Due to the vast number of properties owned and managed by the named brands, each company has access to greater amounts of data related to rental rates, operating expenses, inventory levels, demographic changes, and occupancy information. Having this real time data to leverage, enables the management company to better predict and timely adapt to market changes and fluctuations. 
• National name recognition provides a marketing edge
• More accessibility to trained and experienced professionals
• Often have lower set up costs due to scalability
• Have regional and national vendor relationships which can reduce operating expenses
   

Review the rent roll. An acceptable rent roll should include the following:

• Number of units by size (sq. ft.)
• Type space (climate controlled/non-climate controlled)
• Tenant's name
• Unit number
• Date of tenancy
• Rental rate

A 1 month minimum lease term is most often required when leasing self-storage space.

Lease rates will vary based on unit size and unit type. The lease rate for occupying first floor or drive-up space is going to be higher with multi-story buildings. The lease rate for similar typed space should be consistent throughout the building footprint. If there are outliers, discuss with your borrower.  According to Spare Foot, in 2023 the difference nationally in the lease rate between renting climate-controlled space versus non-climate controed is typically 25%-40%.

Example of rent roll for a proposed facility that is 100% climate controlled

A lender should review a standard lease to confirm that there is no language within the lease that could negatively impact the rentability/marketability of the units within the property the Bank is financing. 
 

Typically the other income associated with self -storage properties  includes administrative fees, unit insurance, late fees, equipment or truck rental, and income from the sale of moving supplies. According to Cushman Wakefield, other income typically represents 4-6% of a self-storage properties gross revenues.

If the project is new construction, obtain a feasibility study to identify the competition, validate your borrower’s forecast for costs, rents, occupancy, operating expenses, and net operating income, and determine the stabilization period.

If financing a Class B or Class C property older than 15 years the lender should require a property inspection report especially if deferred maintenance items are noted during the lenders site visit. 

On an existing property, the borrower’s annual financial statements and tax returns for the last three years will give a lender the most insight into the operating expenses associated with a stabilized self-storage property. For new construction, the Bank will rely on industry standards, the borrower’s proforma, the feasibility study, and the appraisal in estimating the operating expenses.

The Operating Expense Ratio (OER) is the total operating expense divided by EGI. In your, Quick Reference Guide for Non-Owner-Occupied Properties, note that the typical operating expense ratio for self-storage properties falls within the 35% - 45% following range

The lender is required to perform a cash flow analysis prior to presenting a non - owner occupied self - storage financing request to Preflight or Credit Administration for confirmation that the requested loan amount is supportable based on the Bank’s underwriting criteria. Templates for cash flow analysis are in the Commercial Real Estate Policy > Quick Reference Guide - Non-Owner Occupied Real Estate. 

Below is a detailed example of a cash flow analysis on a Self-Storage property.

• Assess the site contractor’s experience in building similar property types of the same scale
• Obtain an active contractor’s license
• Determine if the contractor is bondable
• Obtain financial information if required as a condition of the loan approval
• Review contractor’s website and request a resume of projects
• Collect and review general contractor's liability insurance policy
   

From time to time the lender or Credit Administration will require the borrower to fund an interest reserve at closing. An interest reserve account is a credit enhancement considering the construction project is not income producing while under construction.

The interest costs during construction are funded from the Bank controlled interest reserve account by Construction Loan Administration as the interest comes due. Interest Reserves are non-interest-bearing accounts. 

The underwriting conditions that typically trigger an interest reserve requirement are: 

• Low liquidity levels of the borrower 
• An extended timeline for project completion or stabilization 
• Project size or type 
• Volatile conditions within the economy