Self-Storage, Student Housing Enjoy ‘Cinderella’ Season

MBA (7/28/2008 ) Murray, Michael
"Cinderella teams" go from previous no-names or underdogs to superstars in one season, and the same could be said of self-storage and student housing property demand in the current economic environment.

Michael Scanlon, president and CEO of the Self Storage Association, Alexandria, Va., said Wall Street players are beginning to see self storage properties as having a Cinderella season.

"We're not as glamorous as office buildings, we're not as glamorous as shopping malls—and maybe some other types of commercial real estate—but when you get right down to where the rubber meets the road, we're making money," Scanlon said.

Migration into smaller, more affordable homes will generate short-term demand for self-storage space, some industry analysts said. However, economic weakness could mitigate much of this incremental demand, said a Self-Storage Research report for the first half of the year from Marcus & Millichap Research Services, Phoenix, Ariz.

"Improvement in the coming periods will likely be driven by demographic shifts, including baby boomers downsizing and new retail concepts such as eBay and other business-usage concepts that require self-storage space," the report said. "Expansion in the baby boomer group is forecast at 2.2 percent in 2008, with growth projected to accelerate to an average of 2.4 percent annually, or more than 5 million individuals, over the next five years."

Scanlon said self-storage showed constant growth for the past 15 years—5 percent year-to-year—and more homeowners are keeping items in self storage for several more months than usual despite the declining economic environment. He noted the average time increasing in the past 18 months.

"We're finding that people during this economic downturn right now are actually staying longer than they normally do in self storage, which means that they are in a 'hunker-down mentality,'" Scanlon said. "They are staying there a little longer than they usually do even though fewer and fewer people are moving, and moving is normally a big part of our business."

The apartment market, least impacted by the credit crunch because of increased Fannie Mae and Freddie Mac lending, still registered a "sizable decline," Marcus & Millichap Research said in its second half outlook of the apartment market.

However, Freddie Mac launched its Student Housing Mortgage product this month, which provides funding for acquisition or refinancing of "purpose-built student housing and multifamily properties that are more than 50 percent occupied by students."

Patti Saylor, vice president of multifamily offerings and customer management at Freddie Mac, said the new product is in response to marketplace demand and customer needs.

"The new Freddie Mac Student Housing Mortgage is structured using terms obtained through feedback from our Seller/Servicers and student housing owners and operators," Saylor said.

The program, available to all Freddie Mac Program Plus Seller/Servicers, includes 30-year amortization and the potential for full or partial interest only with up to 80 percent loan-to-value financing. The properties must be two miles or less from the institution of higher education with at least 8,000 students. Multiple schools in the area that consist of 8,000 or more students could also be eligible for the program.

Fannie Mae said earlier this month it plans to increase purchases of multifamily housing loans, particularly for properties up to $5 million in value.

Moody's/REAL Commercial Property Price Indices (CPPI) said the average holding period between repeat sales increased in the past two years. In May, it was 88 months, up from a low of more than 62 months in July 2006. The average transaction price also dropped, with nearly 75 percent of all deals priced less than $7.5 million in May, compared to 50 percent of all deals priced below that amount in May 2007.

Educational institutions could also participate in public-private partnerships to retain the title of the real estate over an extended period of time while a private investor builds facilities that serve the institution, the surrounding community or both, said a report last month, Public-Private Partnerships in U.S. Higher Education, from Moody's Investors Service, New York.
"Colleges and universities have long been strategic real estate investors, and 'banked' real estate holdings can be significant credit strength in some cases," said Roger Goodman, vice president at Moody’s and author of the report. “In higher education, public-private partnerships have been comparatively small transactions and have generally involved student residences or nearby mixed-use real estate developments in urban areas. Recently, we have seen a growing number of structures and strategies for extracting value from a university’s real estate holdings.”

In May, Fannie Mae said it would increase purchases in small loans as well as in the seniors housing permanent debt market; in military housing; and affordable housing.

Commercial real estate prices dropped 3.5 percent overall in May, based on Moody's/REAL CPPI. May was the third month in a row that the index declined