Insights From the 2025 New York Self Storage Association Investment Forum & Key Bank Capital Markets REIT Conference

January 2025

The Self-Storage Sector Continues to Benefit from New Loan Programs

In recent months, storage-focused lenders have introduced a variety of fixed and floating-rate programs to provide options to owners seeking to refinance in-place debt. Owners have welcomed these programs as many storage assets are financed with loans set to mature in the next twelve to twenty-four months.

Given that Federal Reserve interest rate cuts have done little to influence Treasury yields and long-term borrowing rates, owners face the prospect of higher interest costs post-refinance. Average interest rates on self-storage loans made in 2024 hovered in the low-6% range, while maturing loans, expected to total approximately $2.5 trillion over the next five years, are in the low 4% range. Fortunately for owners, this has not prevented lenders from rolling out new programs.

While fixed-rate programs have been popular for most of the last decade due to the low-interest rate environment that prevailed, interest in floating-rate products has grown recently. Over the last few months, despite recent mixed signals, interest rate expectations have tilted toward a more accommodative outlook. During this period, more storage owners have explored the benefits of financing storage assets – as well as on other commercial real estate assets – using floating-rate products.

The appeal of floating-rate debt stems from the interest rate optionality it provides to the asset owner. Specifically, it allows the owner to ride the rate down in the event borrowing costs decline over the life of the loan. In contrast, under a fixed-rate product, the owner would need to refinance – and incur the associated costs – to capture the benefits of a lower rate.

Owners Remain Aware of the Impact of a Slow Housing Market on Self-Storage Rents

Owners of storage assets understand that demand for space is influenced by the volume of housing market activity, which is predominantly driven by existing home sales. The act of moving into a recently purchased home creates a need for storage space, and periods of elevated housing transaction activity tend to see higher demand, and in turn higher rents, for storage space. Conversely, when existing home sales slow – often due to higher interest rates, economic uncertainty, or a tight housing market – muted moving activity equates to fewer people seeking temporary storage solutions.

During slower periods, rent growth is more likely to face pressure, and this has been the prevailing scenario over the last twenty-four months. According to the National Association of Realtors (1), annualized sales of existing homes came in at 4.15 million units in November 2024, down significantly from the transaction volumes experienced in the middle of the COVID-19 pandemic. Unsurprisingly, rent growth has presented a challenge for many storage owners in 2024. According to Yardi Matrix (2), year-over-year asking rents per square foot decreased by 2.4% through November 2024.

Bridge Loans Are Affording Many Self-Storage Owners the Time Needed to Achieve Key Financial Targets

Many of the loans outstanding in the storage sector originated during the pandemic, a period where interest rates were low, home sales activity was elevated, and storage rent growth was robust. At the time, a sentiment seemed to prevail across the industry that these economic characteristics would continue into the future. Subsequently, a historic interest rate hike dampened the housing market and storage rent growth. As we move into 2025, it is evident that many loans will mature at a time when prevailing rates are meaningfully higher, and asset performance is weaker than at the time of origination.

Against this backdrop, many storage owners have struggled to hit key performance metrics and are navigating a challenging transition to perm financing. Lenders have responded to the slower growth environment by favoring financing for top-tier projects. This has left many owners seeking more time to improve performance or keep the project on track until perm loan market activity increases. For many, the answer continues to center around taking on bridge financing, whether it is construction-to-bridge or bridge-to-bridge borrowing because it offers flexibility and affords owners the ability to seek perm financing under more advantageous conditions.

From a strategic perspective, bridge financing offers the asset owner exactly what they need in order to obtain perm financing on satisfactory terms – time to improve asset performance and achieve stabilization. It has become common to use the bridge term to bolster the rent roll and position the property more favorably in the market. Once stabilization takes hold and rent growth resumes, owners seek to secure perm financing. There is a level of consensus across the industry that bridge debt will continue to be viewed as an appealing solution for owners needing more time to produce the kind of rent roll results that attract perm loan financing on terms that leave room for satisfactory cash flow.

Final Thoughts

The recent New York Self Storage Association Investment Forum and Key Bank Capital Markets Conference underscored the resilience and adaptability of the self-storage sector in navigating evolving market conditions. Industry participants spoke about several of the innovative financing programs that lenders have introduced to meet the needs of asset owners in today’s market. Floating-rate programs have generated more interest in recent months, and owners continue to view bridge financing as a strategic option to address the challenges posed by higher interest rates and slower housing market activity. With the right application, these tools can help owners navigate a complex landscape where a large volume of debt is scheduled to mature as storage owners continue to work through macroeconomic challenges.