Business Owners Can Thrive in the New Retail Ecosystem

Despite what you might be hearing in the news, in today’s strong economy, retail trade continues to grow. April 2019 saw a year-over-year 3.1 percent increase in US retail sales. Despite the convenience of ecommerce, in-store shopping remains dominant. Sixty-four percent of Americans today are shopping in-store vs. 36 percent shopping online.  Shopping in stores accounted for 85.7 percent of retail sales in 2018. Most consumers still enjoy and value the physical shopping experience, where they can see, hold, touch, and try on merchandise before buying.

Ecommerce famously has had a negative impact on stores and shopping malls, and many observers hold ecommerce chiefly responsible for the numerous store closures and downsizing of the past few years. The challenges ecommerce presents to real estate are complicated. However, we discern potential areas for growth in the retail CRE sector, especially for owner-users. Commercial real estate pundits who predict doom, gloom, and the eventual loss of retail assets’ value may be blinding themselves to today’s opportunities.

Mixed-use properties

Mixed-use properties are particularly well suited to these changing times. Retail owners have by now pruned their dead or dying properties and changed their focus to higher-growth retail and mixed-use projects (retaildive.com). The owner/user model, where the owner’s business occupies at least 51 percent of the net rentable square footage of a property, is eligible for advantageous SBA 504 loans. The commercial and residential combination is common for SBA-accepted properties, e.g., a retail business below and rental apartments above.

An SBA 504 loan we recently arranged for the acquisition of a mixed-use, three-story retail/residential building in Brooklyn, New York, is a good example. The buyer, Brooklyn Brokerage, is an independent Insurance agency that will occupy the ground-floor commercial unit and a second-floor apartment unit for the business, and lease a third-floor apartment unit for additional income from the property. this type of small storefront building with apartments above and retail below is a common sight in New York City. The commercial ground floor usually occupies less square footage than the residential portion above. Urban infill markets with walkable retail such as the property described above, offer generally stable opportunities, especially when they are well well-maintained, and storefronts are visible from the street.

“Total Commerce”

As retail evolves at a rapid pace, shopping today is an anytime, anywhere, 24/7 activity. The boundaries between brick-and-mortar stores and e-commerce are blurring for general merchandisers. No longer this-or-that, either/or, it is one, total commerce ecosystem, and smart retailers will keep up with the trend. “The message needs to be: This is how consumers are choosing to shop. We need to be there in whatever way they want us to be,” according to cnbc.com.

Many online retailers are now finding it profitable to open brick-and-mortar outposts that complement and facilitate their online sales and deliveries. As these sellers scale up, the move from “click to brick” is necessary for continued growth. Digital native brands will open approximately 850 physical stores over the next five years, according to a report by JLL on more than 100 top online retailers. Amazon’s acquisition of Whole Foods is part of this trend, as well as its physical retail sites Amazon Books, Amazon Go, AmazonFresh Pickup, Amazon Pop-Up stores, and Amazon Hubs for package pick-ups and drop-offs, with plans to open hundreds more. A recent study by ICSC indicated that when native online retailers open brick-and-mortar stores, they experience a 45 percent increase in online traffic in that market area.

Further timely investment opportunities are emerging from the repurposing of abandoned big box stores and retail malls to create spaces for ecommerce warehousing and fulfillment operations.

Service Retail

Retailers know that one key to differentiating their businesses and attracting new and loyal customers is to deliver superior customer service, beginning with the first-time potential buyers walk in to their stores. The key is to develop a relationship with the buyer that will translate into repeat business and word-of-mouth referrals. Service retail will never go out of style, but it is evolving in line with today’s market conditions. According to retaildive.com, store closures have peaked by now, and physical retailers are going all out to compete by reinvesting in their stores.

The retail-as-a-service concept has expanded to experience-driven retail that creates an attractive, even entertaining atmosphere that fosters a sense of social community. Retail Prophet CEO Doug Stephens has define the concept as “hosting brands in a space that is curating that space in a very particular way, employing great design, creating great online content,” as well as great staffing, merchandising and analytics. For example, the online furniture retailer Wayfair is opening a store with showrooms and displays that will include interior designers to help customers make choices (Bloomberg.com). Other owner-users are converting industrial-type properties, such as abandoned big box stores, into mixed-use office and ecommerce fulfillment centers.

Retail innovations

Retailers are experimenting with technology, location size and various customer services. In line with the function of stores meeting consumers’ desire to see, hold and touch a product before buying, the retail chain b8ta’s 15 stores, plus one in Macy’s in New York City, serve as presentation centers for consumer electronics and other innovative products. Some chain retailers are downsizing their stores, including Ikea and Nike. The Nike Live concept has localized products and an intimate feel, with an emphasis on mobile technology and tie-ins for NikePlus members.

Another great example: Nordstrom was losing traffic in its department stores due to the popularity of its online sales. It is expanding its service-hub Nordstrom Local concept that combines several of its most popular or highly demanded services under one roof to serve customers in their own local markets. The boutique stores have no inventory; customers can pick up online orders. “Local” isn’t a mini-Nordstrom store; according to forbes.com, it’s “a wholly new offering seeking to meet customers where they [a]re in a remarkable, intensely customer relevant way.”

Financing

Another great example: Nordstrom was losing traffic in its department stores due to the popularity of its online sales. It is expanding its service-hub Nordstrom Local concept that combines several of its most popular or highly demanded services under one roof to serve customers in their own local markets. The boutique stores have no inventory; customers can pick up online orders. “Local” isn’t a mini-Nordstrom store; according to forbes.com, it’s “a wholly new offering seeking to meet customers where they [a]re in a remarkable, intensely customer relevant way.”

Brick-and-mortar retail properties continue to evolve in many ways, and, we believe, will offer more and more options for investors. When it comes to financing mixed-use properties with retail components, the SBA 504 program has advantages that no other can equal, including 90 percent LTV (loan-to-value ratio) financing, a low fixed rate, and up to 25-year terms. We specialize in helping borrowers though the SBA 504 loan process to ensure success. When you work with an experienced SBA lender like Liberty SBF, you can be confident that we will anticipate any problems and help you overcome any potential obstacles.

Interest rates are low, and now is the time to lock in your fixed-rate SBA 504 loan. Contact Liberty SBF, and we can get the job done in 45 days or less.


Email info@i.libertysbf.com or call (213) 297-5747.

You can also connect with Liberty SBF on LinkedIn


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Green Office Properties & the SBA 504 Loan

Business owners in need of office space often ask themselves, which is better: rent or buy? The well-known advantages of renting are the low capital commitment, improved cash flow, tax-deductible rent, reduced responsibilities, and the ability to occupy space in a more high-end office building than you could afford to purchase. When you rent, however, you are not building up equity; your landlord is. Moreover, your landlord controls most aspects of your premises, which can lead to frustrating situations.

The advantages of ownership are many, beginning with equity, which increases in value when a property appreciates over time. You can deduct your mortgage interest from your tax bill, and take a tax deduction for depreciation for up to 39 years of ownership. Perhaps most important of all is that when you decide to purchase an office property and plan to occupy a little over half of the space, you will be eligible for financing under the SBA 504 program offering the best features possible in a commercial property loan, including 90 percent LTV (loan-to-value ratio) financing, a low fixed rate, and up to 25-year terms.

For SBA 504 lending, a property is considered to be owner-occupied when 51 percent or more of the property’s space is occupied by the owner’s business. Owner-occupiers are considered a lower risk for lenders because they are assured that the owner will be committed to the property both as landlord and as chief occupant.

Even better, when you acquire a green office property you can help protect the natural environment, have a healthier workplace, and take advantage of the special SBA 504 Green loan program, when the office property you are purchasing meets certain environmental standards.

Green Is Good for Business

The office of the future is already here, with the multifaceted trend toward sustainability “not just a good thing to do, but something we must do to stay competitive.” The U.S. Green Building Council’s LEED green building certification is the globally recognized standards for the sustainable design, construction and operation of green buildings. LEED certification is also an SBA public policy goal, extending to SBA 504 loans with up to $5 million aggregate limit per borrower. The commercial real estate industry is generally proactive on sustainability, and, like many local and state governments, continues to advance green design without regard for national policy. “We Are Still In,” a coalition with members from all 50 states that affirms their adherence to the Paris Agreement on climate change and sustainability, represents $6.2 trillion in economic power, according to JLL.

Energy savings are a focus for green building and construction, and many real estate investors are committed to “high-performance sustainable real estate.” The Alliance for a Sustainable Future, which includes 102 cities, promotes energy efficiency policies with incentives for commercial real estate. According to the World Economic Forum, LEED-certified buildings in the US and other countries consume 25 percent less energy and 11 percent less water than non-green buildings.

Wellness Wins

Today, wellbeing is an important workplace value that emerged in part due to the early ‘90s flap over chemical emissions and “sick buildings.” Employee occupants care about a company’s investment in sustainability, and green buildings have been shown to impact people’s health directly. Beyond physical wellness, employers want to support the cognitive and emotional wellbeing of their employees. According to Building Design & Construction’s blog, a study by the Harvard University T.H. Chan School of Public Health found that indoor air quality, CO2 levels, and chemicals have a direct impact on cognitive function. Employees scored on average 61 percent higher in cognitive function scores in strategically designed green offices than their counterparts in non-green office environments. “Biophilia” describes the scientifically proven connection between people and the patterns, rhythms, and textures of nature and natural materials. Biophilic design increases occupants’ connectivity to the natural environment through the use of direct and indirect nature. It can reduce stress, enhance creativity and clarity of thought, improve wellbeing and expedite healing.

Occupy Your Own Green Office Property

The SBA 504 Green loan program emerged from a shared mission of the SBA and the US Department of Energy to inspire small business owners and entrepreneurs to leverage SBA loan programs for building owner-occupied energy efficiency projects and improving energy efficiency in existing properties. According to the National Renewable Energy Laboratory, increased loan amounts and savings on utility bills are not the only benefits of going green. While further benefits may be difficult to quantify in a financial analysis, efficient equipment like LED lighting saves on costs because it lasts longer. Building insulation, reduced leakage, and energy-efficient HVAC systems, improve air quality, occupant comfort, and wellbeing. Increasing the amount of daylight in a space can save energy, improve the quality of lighting in a space, and help increase occupant productivity, reduce the number of sick days, and improve customer experience.

A good example of such energy- efficient improvements was the recent acquisition by H Cabinet, Inc. of an industrial property in San Diego, California. Liberty SBF arranged the borrower’s SBA 504 Green loan. Part of the square footage is unfinished office space, and the rest of the building is a large box warehouse, ideal for storage and/or other industrial uses. The borrower’s plan to implement $55,000 worth of improvements to reduce energy consumption qualified the property for the Green loan program.

Class B Office Buildings Offer Opportunities

Another way for owner-occupiers to take advantage of the SBA 504 Green loan program is to acquire and reposition outdated Class B and C office buildings by improving amenities and upgraded energy efficiency that today’s tenants have come to expect. Rents for these properties are rising, and those that lack key amenities are losing potential tenants to newer office buildings. Investment in improvements can reposition these existing properties as competitive, green, Class A assets in a “rise of the underclass,” according to executives of ADI Construction.

No matter which type of office building you invest in and occupy, Liberty SBF can advise and assist you to make your property eligible for an advantageous SBA 504 Green loan. You will have the added satisfaction of saving energy costs and making your own contribution to the global movement for sustainability. An experienced SBA lender like Liberty SBF will help you overcome any potential obstacles and conclude the loan process successfully.


Contact Liberty SBF today. Email info@i.libertysbf.com or call (213) 297-5747.

You can also connect with Liberty SBF on LinkedIn


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New 25-Year Fixed Rate SBA 504 Loans Reach $1 Billion Milestone

Small businesses, banks, and investors warmly received the SBA’s 25-year loan program, launched in July 2018. In June, less than a year later, the total amount lent reached $1.04 billion, exceeding the $1 billion goal for the first year. The numbers represents 1,289 fixed-rate SBA 504 loans to U.S. small businesses.

Also: Read our article on what the 25-year term means to business owners.


Senior Housing Needed for Middle-Income Boomers

Medical Facility in Arizona

Senior housing today is unaffordable for middle-income retiree such as nurses, schoolteachers, firefighters and steel workers, and they will have too much income to qualify for Medicaid. Aging boomers also want more amenities and independence, and as-needed healthcare than earlier generations. Real estate investors, developers, owners and operators need to innovate fast. Some proposed solutions include tax incentives, repurposing existing real estate like former malls and big-box retail, designing for construction, operational efficiency and cost savings, and volunteer caregivers.


Rising Costs of Mandated Hotel PIPs

Nearly every hotel deal comes with a mandated, formal property improvement plan (PIP) that addresses every aspect of the hotel from mechanical systems and plumbing to lighting, landscaping, and parking. PIPs are increasingly costly, as branded hotels have become more aggressive in their PIP requirements. The PIP can be negotiable, especially for sellers and buyers who have existing relationships with the brand. Negotiating PIPs early on can directly increase profits for sellers and lower the costs for buyers.


US Retailers Strive to Differentiate Offline Channels

A recent study by Avison Young describes the challenges online retailers present to offline retail distributors in the US. As Amazon creates a shopping environment unrestricted by time, place, and product, some department store chains have improved offline sales by stepping up customer-friendly services. For example, Nordstrom is expanding its service-hub Nordstrom Local concept that combines several of its most popular or highly demanded services under one roof to serve customers in their own local markets.


How Can We Help You?

Liberty SBF offers quick closings for SBA 504 and conventional loans. We’d love to help you.

Let’s Talk. 

Medical Office in Phoenix, SBA 504 Loan Benefits

The Latest Commercial Real Estate News From Liberty SBF


10 Reasons Applying For an SBA 504 Loan is Worth It

AZBigmedia.com published a summary of the top 10 reasons to apply for an SBA 504 loan. A low down payment topped the list, allowing business owners to purchase a property they otherwise couldn’t afford. A 30-40 percent down payment isn’t attainable for most small business owners but the SBA 504 loan program finances up to 90 percent of the acquisition plus some soft costs. Long term, fixed interest rates are other reasons to go SBA 504. The full list provides a quick education on 504 financing.


Phoenix Medical Office Vacancy Falls 33%

Doctors talking in hospital hallway

Demand in the form of an increased population has helped the medical office market in Phoenix. A new report from JLL shows that vacancy rates have fallen by 33 percent in the past five years. But, it’s not just a population boom that is driving growth in this corner of America. Over the years, Phoenix has attracted some heavy hitters in the medical provider sector including the Mayo Clinic, Banner Health and Dignity Health, the largest hospital system in the US.


The Drumbeat to Cut Rates Gets Louder

As the trade wars continue to escalate, Federal Reserve Chairman Jerome Powell reassured the financial markets, saying the Fed will “act as appropriate to sustain” the current economic expansion. Is a rate cut appropriate to the times? Anxious about the trade war, Wall Street is expecting that the Fed will cut its benchmark rate twice before the end of the year.


Liberty Closes Over $40MM in Industrial Property Loans

Liberty SBF clients have been participating in the new economy with over $40MM in industrial property loans closed across the county. See all of Liberty SBF’s recently closed loans.


How Can We Help You?

Liberty SBF offers quick closings for SBA 504 and conventional loans. We’d love to help you.

Let’s Talk. 

Flex Office Trend and the Small Business Persons of the Year…

Flex Office Is Growing in Urban Markets

Front exterior of an industrial warehouse building in Queensland Australia. Click to see more…

According to JLL, flex office space is growing by an average of 33 percent each year, accounting for almost two-thirds of US occupancy gains. No markets are over-saturated, and there are plenty of opportunities for this type of asset in many US metropolitan areas. The top ten growth markets are New York City, San Francisco, Silicon Valley, Austin, Boston, Northern Virginia, Washington DC, Seattle, Denver, and Los Angeles’ Westside.


Arizonans Named SBA Small Business Persons of the Year

Jennifer and Jeff Herbert, founders of Superstition Meadery in Prescott, Arizona, were named 2019 SBA Small Business Persons of the Year. They produce mead (fermented honey with fruit, herbs, and spices), the world’s oldest known alcoholic beverage. The Herberts grew their $5.5 million, 140-employee, two-locations business with SBA financial and counseling support. An SBA 504 loan covered the costs of constructing its new distribution and franchise support center in 2017.


What You Need to Know About SBA 504

TMC Financial’s CEO Barbara Morrison spoke about SBA 504 lending to cpexecutive.com. She was asked about the three main things borrowers don’t usually know about 504 lending. One thing she said was that many business owners are unaware of the program and its 10% down payment, which she called a “game-changer” for many owners. Other business owners weren’t aware they qualify as “small” business owner. “The SBA’s definition of ‘small’ is substantially larger than what most people assume. The truth is, most for-profit businesses qualify,” she said. Morrison also said that there is a misconception about how long it takes to get SBA financing.


Liberty SBF Adds New Originator to Fast-Growing National Team

Liberty SBF is excited to announce that Carlos Vasquez, MBA has been appointed VP, Originations, a new originator on our fast-growing national team of top-ranked commercial real estate professionals. Based in Austin, Mr. Vasquez will further increase our capacity to provide high leverage fixed-rate SBA and conventional loans in Texas.


How Can We Help You?

Liberty SBF offers quick closings for SBA 504 and conventional loans. We’d love to help you.

Let’s Talk. 

Hotel Financing With the SBA 504 Loan Program

The US hotel industry saw another record year in 2018, reaching absolute values that were the highest ever benchmarked. A 10th consecutive year of growth is predicted for 2019, according to CBRE Hotels Americas Research.

Borrowers who seek to acquire or refinance hotel properties are finding that some lenders today are cautious on hotel deals, as many see the sector at a peak.

There are still good deals out there. As experienced lenders, we are convinced that the best, most cost-effective solution is to finance your hotel is with an SBA 504 loan. In this article, we will walk you through today’s peak hotel market, as well as recent changes that affect SBA 504 loans.

The thriving hotel market

The demand for hotel accommodations continues its nine-year rise in line with the continuing strength of the US economy, with hotel occupancy seeing a 0.5 percent year-over-year increase to 66.2 percent in 2018, the fifth straight record level for the industry. The average daily rate (ADR) rose 2.4 percent to $129.83, and revenue per available room (RevPAR) increased 2.9 percent to $85.96. Group and corporate travel stays will be a consistent source of demand growth for hotel rooms in the U.S., according to STR. Additionally, weekday demand is very strong, indicating that corporate/ business guests are traveling more frequently.

CBRE even predicts that overall hotel returns over the next three years will be the highest of any commercial real-estate sector. According to CBRE’s R. Mark Woodworth, “The magnitude of profit growth may not be spectacular, but the probability for revenue growth is solid, and operating margins remain well above historical levels.” Growth will be slower for sure. STR & Tourism Economics forecasts demand growth year¬-over-¬year at 1.9 percent, compared to prior projections of 2 percent.

What does this mean for loan seekers?

Hotels have emerged as one of the commercial real estate sectors where owners can still make the returns compute. Bank financing on commercial real estate isn’t as readily available today as it was over the past few years, however, and owners may face challenges in finding affordable financing. Timing can make the difference between winning and losing for owners seeking to lock in a relatively low long-term interest rate on an asset. We believe the proven solution is to borrow from an experienced hotel lender with expertise in SBA 504 loans. Capital is there for reaching short- and long-term financing goals if you know where to find it.

SBA 504 loans and hotels

Hotel owners will find the SBA 504 loan has advantages that no other can equal. For facilities that are older than two years, borrowers can take advantage of all the many benefits that come with the SBA 504 program: 85 percent LTV (loan-to-value ratio) financing, a low fixed rate, and up to 25-year terms. The SBA guarantees a portion of the loan assuming the risk of default, allowing for a much higher LTV than any conventional commercial property mortgage alone. SBA 504 loans can be used solely to acquire existing hotels, acquire and renovate a hotel, and refinance an existing loan.

The SBA classifies some properties as “special purpose” properties. It defines a special purpose property as “a property that is appropriate for one use or limited use: a building that cannot be converted to another use without a large capital investment,” and requires a 15 percent down payment on 504 loans.

Also, borrowers cannot use the SBA 504 program to refinance an existing SBA or other government loan.

Close-up of an SBA 504 loan

Let’s demystify the nature of an SBA 504 loan. Imagine a borrower is seeking SBA 504 financing for acquiring a Best Western hotel for $4.2 million, including the PIP. Where will the funds come from? How much money does the borrower need to come up with out-of-pocket for the down payment?

We can calculate the financing structure of an SBA 504 loan simply as: 50 percent + 35 percent + 15 percent = 100 percent. That formula breaks down as follows:

• 50 percent: The first 50 percent takes the form of a conventional loan from a financial institution like a bank or specialty SBA lender. The first-lien loan is usually a fixed-rate loan amortized over 25 to 30 years. In our example, this means that the first-lien lender will commit $2.1 million toward the total financing of the deal.

• 35 percent: The next 35 percent of financing is a 20-year second-lien fixed-rate loan from an organization known as a Certified Development Company (CDC). A CDC is an SBA-regulated, nonprofit organization with a mission to promote community economic development through the SBA 504 loan program. Each of the more than 260 CDCs nationwide covers a specific geographic area of operations, usually the state in which the CDC is incorporated. The SBA assumes the risk on the CDC’s second-lien loan through its guarantee. If the borrower defaults, the SBA will pay off the loan. Our hypothetical hotel buyer will secure a second-lien loan in the amount of $1.47 million from the CDC, guaranteed by the SBA.

• 15 percent: The final 15 percent is the down payment from the borrower. Most conventional loans require a 25 percent minimum down payment, so the borrower realizes significant cost savings with an SBA 504 loan. For our imagined borrower, the down payment will be $630,000.

• When a borrower is acquiring a branded hotel, the franchise typically requires a property improvement plan (PIP) that will bring a hotel into compliance with the brand’s latest standards, from design to energy efficiency. The SBA 504 loan will finance up to 85 percent of the acquisition cost plus PIP.

Recent changes in SBA 504 regulations

The past few years have seen the SBA increase its scrutiny of borrowers’ qualifications for the 504 program. While it used to overlook borrowers who were minority (less that 20 percent) stake partners, the SBA is now looking closely at them and the type of hotel ownership they hold. Formerly, when minority owners had too much SBA debt to qualify, they could hold a five percent stake, while the majority owners were said to be running the business. Today, they are no longer tucked away from SBA scrutiny—every borrower on a deal must have no more than $5 million in total outstanding SBA debt. A good SBA 504 lender with hotel experience will understand this requirement, and help you structure your deal to help avert any future problems with your partner borrowers down the road.

A fairly new SBA requirement is for borrowers to submit a feasibility study to ensure that market conditions support the potential future success of the hotel investment. The feasibility study is a report by a qualified third party that examines the local market, demographics, and other factors that are expected to affect the hotel property’s performance, such as an already overbuilt market.

After reviewing an SBA 504 loan package, an experienced SBA lender will ask the right questions, anticipate problems, and help the borrower overcome any potential roadblocks. This is why it’s so important to find the right lender. The experts at Liberty SBF have an extensive network of finance industry contacts. We specialize in helping guide both borrower and CDC though the loan process efficiently to ensure their successful SBA 504 loan.

Smart financing

The hospitality industry may be at a peak, as some predict, but Liberty SBF also believes there are still good assets to be found and when a borrower has identified one we are here to help them secure the deal with a low, fixed rate.


Contact Liberty SBF today. Email info@i.libertysbf.com or call (213) 297-5747.

You can also connect with Liberty SBF on LinkedIn


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Changed Focus for Late-Cycle CRE Investing

City skyscrapers graphic with arrows and 2019

As a global economic downturn begins to take shape, late-cycle commercial real estate investors are focusing on industrial and multifamily as the asset classes that will best weather any coming storms—unlike the office and retail boom that preceded the 2008 crash. The Federal Reserve’s stricter controls on construction loans have effectively prevented overdevelopment, say industry observers, giving rise to predictions that the approaching downturn will be relatively gentle.


Self-Storage Spotlight

Don’t miss the just-published Self-Storage Spotlight, a comprehensive report by Liberty SBF market analysts that surveys every aspect of the “recession-proof” self-storage market and its current, extended growth cycle.


E-Commerce Packages Overflowing Lockers

E-commerce is growing by 20% every year. Multifamily owners have installed digital storage lockers to help handle the heaps of e-commerce packages that don’t make it to tenant doorsteps. Space is limited, lockers are fast becoming overloaded, and adding more lockers is costly and non-scalable as volume increases. One solution is Fetch, a smart new offsite service company that offers multifamily operators unlimited storage for everything from meal kits to mattresses, and allows tenants to schedule deliveries at their convenience.


Liberty SBF Provides $1.6M for Warehouse Acquisition

Liberty SBF successfully closed a $1.6 million SBA 504 loan, in partnership with Florida Business Development Corporation, for an appliance supply company’s acquisition of a warehouse property near Orlando, FL. Despite a delay due to last month’s government shutdown, the transaction closed within a very tight timeframe. Liberty SBF provided 90% LTV financing with both a first and interim second lien loan, allowing the business owner to preserve cash for working capital.


An Overview of the Self-Storage Market

Self storage building exterior with red doors

For a quick, clear overview of the robust national self-storage industry, see the market-by-market slideshow by nreionline.com that ranks 36 US MSAs by population and employment growth statistics, vacancy rates, and completed facilities. The #1 growth market? Las Vegas.


How Can We Help You?

Liberty SBF offers quick closings for SBA 504 and conventional loans. We’d love to help you.

Let’s Talk. 

Spotlight on Self-Storage: What’s all the Buzz About?

This growing asset class may not exude the glamour of a shiny downtown office tower, but self-storage assets have for a long time been the unsung heroes of commercial real estate investments.

Today, commercial real estate experts view self-storage facilities as stalwarts that some even call recession-proof.

We agree: self-storage is a safe and smart bet for owners, especially when they can preserve cash for working capital with an SBA 504 loan from Liberty SBF that provides up to 85% LTV financing.

The self-storage market

Demand is strong and shows no sign of abating. In 2016 there were more than 50,000 self-storage facilities in the U.S., most of them nondescript warehouses divided into cubicles of varying sizes. As of December 2018, according to the Self-Storage Almanac, the U.S. has more than 2.3 billion square feet of rentable self-storage space (about 7 square feet per individual). We are now well into an extended self-storage growth cycle. Supply is increasing to meet the demand. In 2019, new facilities continue to come online, built by individual owner-operators and institutional investors alike.

While observers worry about oversaturation in some markets, the concerns of overbuilding are overstated on a national scale. Only certain submarkets and clusters within the top 50 MSAs are at risk of overbuilding; Portland, OR and Nashville, TN reported rental rate declines of more than 5% (according to a November 2018 study by Yardi). While it is difficult to pinpoint overbuilding nationally or by MSA, other major markets that reflect slight declines include Denver and Miami. There are fears of oversaturation in Phoenix and San Diego, for example but the fears have failed to materialize so far.

Our analysis indicates that self-storage will remain a hot investment in 2019 in large markets such as New York City and Boston. The strong and increasing appetite for self-storage space in growing secondary markets also opens opportunities for tremendous growth.

Demographics

The demographics are promising, and the market is growing to serve increasing demand. According to the Self Storage Association (SSA)’s 2017 Self Storage Demand Study, almost one in ten (9.4%, or 11,806,381 out of 126,067,560) U.S. households rents self-storage, representing all age groups. (Millennial renters account for 11% of the market; baby boomers for 7%; and the “greatest generation” for 5% of the self-storage market.) Costhelper.com reports that the average national storage unit costs are: $40-$50 per month for a 5-by-5-foot unit; $75-$140 per month for a 10-by-15-foot unit; and$115-$150 per month for a climate-controlled 10-by-15-foot unit.

Home prices are rising faster than wages in 80% of housing markets in the U.S., especially in the urban areas where the higher-wage jobs are. Urbanization is pushing renters into the city, with smaller and denser housing and limited storage space. The buy-or-rent calculation has evolved, with nearly two-thirds of Americans now living in areas where it is more affordable to rent an apartment than buy a home. Renting increases the likelihood of residents to need a storage unit; for example, renters move more frequently than homeowners, and need places to store their furniture and belongings while they are in transition.

Different generations have their own economic and lifestyle reasons for needing to rent self-storage. Millennials, the largest demographic group in the U.S., are delaying or rejecting homeownership. More and more baby boomers are choosing to downsizing their living arrangements but still need to store their overflow belongings.

A recession-resistant investment

Self-storage assets are considered recession-resistant because they have become a basic necessity, not a discretionary expense. Self-storage ranks alongside other essential, need-based asset classes such as retail groceries and healthcare. During economic downturns, such as after the 2008 crash, people downsize their residences, moving to apartments and increasing the demand for self-storage.

Demand for self storage space is based on life events—what the industry calls “the four Ds”: divorce, death, downsizing or dislocation (i.e. job loss). Add to that college graduation, marriage, renovations, and other more positive events that fuel the need for self-storage.

Industry conferences are spreading the gospel of self-storage with encouraging information for investors: self-storage is one of the least foreclosed real estate sectors. Self-storage performance may vary from market to market; e.g., throughout 2018, West Coast markets recorded high occupancy and asking rents.

While a majority (70% ) of the self-storage renters are residential, U.S. businesses represent a healthy chunk of the market: according to Marcus & Millichap, More than 11% of U.S. businesses (1.33 million out of 12 million) are renting storage, and the market is growing, reaching higher penetration than the residential segment (9.4%).

With an economy that supports business expansion, self-storage offers a cost-effective option compared with office and retail rents, and more companies are likely to make use of such facilities this year.

A reliable resource

Another plus for investors is the sticky factor. Self-storage rental turnover is relatively low: most people who rent a storage unit opt for renting it for more than a year. Users don’t shop around after settling on a self-storage solution, and the average lease term for residential self-storage is 13.4 months. Only the smallest percentage of renters occupy a self-storage space for less than three months.

Which are the optimal markets for investment in self-storage? Heavily populated markets without zoning restrictions or community opposition are ideal when looking to purchase and/or develop a self-storage facility. Visibility is important; exposure on highways or major local thoroughfares is an advantage. Currently, self-storage development activity is highest in Portland, Nashville, Orlando, Seattle, and Miami. Desirable locations are everywhere in major MSAs and secondary markets, especially with easy access to:

• Busy intersections
• Industrial areas
• Office nodes
• Universities
• Military bases
• Retail centers

Adding value

With a little imagination, there’s no limit to what a safe, secure, dry storage space can be used for. Self-storage owners and developers are thinking far beyond the no-frills storage cubicle and adding amenities for a competitive advantage. Consumers today expect greater value across the board. Climate-controlled units can help to protect and preserve sensitive items. Security is a priority: advanced security measures such as an onsite manager, video surveillance, and electronic gates provide peace of mind. Offering multiple unit sizes allows for flexibility to suit different renter needs. Conveniently located elevators, lifts and doors and the use free of charge of handcarts and dollies make getting to and from the storage unit efficient and easier, and reduce the physical strain of moving belongings to a unit.

Smart financing

In 2010, the SBA deemed some businesses with rental income (“passive income”) eligible for its programs, giving self-storage operators the opportunity to take advantage of the SBA 504 loan’s many benefits.

The SBA 504 program is far superior to any other financing for self-storage property owners. A borrower needs only a 15% down payment toward the purchase of a facility, while most conventional loans require 25% or more out of the borrower’s pocket for a down payment. We can also refinance a property that is approaching stabilization or close to being fully leased up with an SBA 504 loan.

Talk to Liberty SBF about SBA 504 financing for your self-storage property today. As always, we’re more than happy to help.


Contact Liberty SBF today. Email info@i.libertysbf.com or call (213) 297-5747.

You can also connect with Liberty SBF on LinkedIn


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