What Does the Fed’s Interest Rate Cut Means for Self Storage?
posted on 8/5/2019 7:08:00 AM
The Federal Reserve’s quarter percentage point interest rate cut on the last day of July could aid self storage developers with short-term loans in lease up, but it’s unlikely to have a dramatic impact on an already attractive lending environment.
As macroeconomic data showed a negative impact from the trade war, the Fed moved to shield the U.S. economy against downside risks from trade policy and weak global growth. It was the first rate cut since the end of 2008 when the economy had slipped into a deep recession.
“I do not believe the Fed’s rate cut hurts valuations in any way, but I do not see it having a dramatic impact,” said Ryan Clark, director of investment sales for SkyView Advisors. “If the Fed’s rate cut is effective, it may prolong the macroeconomic expansion cycle and push the next recession further into the future. This will be positive for continued strong operating fundamentals and asset valuations for self storage.”
Asset valuations are currently strong in part because the cost of capital is already low with the 10-year treasury yield hovering around 2%, analysts said. With the cost of capital already trending downward, owners had been contemplating a refinance or sale even prior to the rate cut, Clark said.
Eric Snyder of Talonvest Capital said the rate cut will translate into lower rates for loans that are short term and based on prime or LIBOR.
“Prime rate loans will see a direct correlation to the movement of the Fed funds rate as long as there is no floor,” or minimum interest rate charged, Snyder said. “Additionally, loans that are on 30-Day LIBOR will also trend in the same direction as the Fed Funds Rate.”
Snyder believes the rate cut will allow private owners who utilize debt to acquire or build properties to access less expensive money. And that will lead to loan growth.
“We have clients who are underwriting their developments and value add acquisitions and basing their debt payment projections on the trajectory of the Forward LIBOR Curve. Currently the Forward LIBOR Curve shows a decreasing to flat projection. This allows owners to project flat to lower rates or even buy a cap for minimal costs.”
Marc Boorstein, a principal of MJ Partners, said that’s good news for self storage investors, the overwhelming majority of whom use debt to buy properties. The quarter-point rate cut could fuel momentum in sales transactions.
“Most of the groups bidding on properties and portfolios will be putting debt on it, at 50 to 75 percent. Every time the rate goes down, they get a better cash flow and theoretically can pay higher price. We are anticipating a positive impact for valuations due to debt costs being a little cheaper.”
For transactions where properties are stabilized, the most recent rate cut probably wasn’t necessary to boost that market, Boorstein said. But he believes the rate cut could be positive for developers and others holding construction or bridge loans who are working to lease up amid more supply competition.
“For the deals that have a floating rate for construction, it’s helpful,” Boorstein said. “Most developers are not meeting their projected lease up in terms of revenue. When you are in lease up you are in a race to cover those financing costs. With lower interest rates that are variable and may go down, it gives those developers more time. This should have a noticeable effect.”