Lessons Learned: CMBS Financing Rolls with Market Punches

Lessons Learned:  CMBS Financing Rolls with Market Punches

Mini-Storage Messenger – September 15, 2016

Like a champion fighter who absorbs repeated jabs and hooks but is still standing to claim victory after a hard-fought bout, CMBS markets are rolling with the market’s punches and once again providing storage owners with great lending options.

Borrowers ask lenders and mortgage brokers plenty of questions these days about whether CMBS loans are right for them. To start, ask yourself a few questions:

  • Is your current loan draining your monthly cashflow with its short 15- or 20- year amortization schedule?
  • Does your lender limit your loan amount based on your initial investment?
  • Do you want to lock into a loan which guarantees a low interest rate for ten years?
  • Do you want to reduce your recourse exposure?

If you answered “yes” to any of these questions, you are a good CMBS loan candidate.

Following a tumultuous recessionary ride, CMBS loan volume has steadily returned to impressive levels. Through the first half of 2015, new CMBS issuance in the United States totaled nearly $55 billion for all commercial property types and is on pace to finish the year at between $105 and $110 billion. Although CMBS lending is on the upswing, it is still at only half the peak volume of $229 billion reached in 2007.

While for years CMBS lenders viewed self storage as inferior to retail, office, multifamily and industrial real estate asset classes, today it is considered a darling and preferred property type thanks to its stable industry performance, low historic default rate, no exposure to large tenants, and relatively small loan amounts. Yet storage still only comprises a sliver of the total CMBS market at about 3% of all outstanding loans. This year’s anticipated CMBS storage loan volume is $3.2 billion for approximately 500 loans, however this estimate may be low given the recent announcement that Amerco, the parent company of U-Haul, will secure roughly $575 million of CMBS financings for 190 facilities alone.

Global Events Hit Home

Given fiscal and monetary events in Greece, China and Puerto Rico, as well as sluggish Wall Street earning reports, the financial markets have become more risk averse in recent months. Although storage industry fundamentals remain strong and steady, national and global pressures have created CMBS pricing volatility.

By late July, interest rate spreads over Treasury swaps had widened 10 to 30 basis points depending on each CMBS lender’s profitability matrix. Interest rates for 10-year fixed rate deals were closing in the 4.5% to 4.9% range, up at least .50% from transactions closed in March and April due to increasing Treasury yields and lenders’ wider quoted spreads.

Despite these recent hits, we are still in an extremely low interest rate environment. CMBS lenders are absorbing these punches and continuing to offer aggressive terms on stabilized storage assets.

For example, for a non-recourse, high-leverage loan with the ability to pull equity (cash) from refinancing, a CMBS loan can offer 5- to 10-year fixed rates, up to 75% loan-to-value on a non-recourse basis (with standard carve-out exceptions), 30-year amortization, and interest-only payments for a specified period. CMBS lenders are most lenient when allowing borrowers to cash out based on the property’s historic operating performance and valuation. These loans are assumable and may be attractive to a future buyer should interest rates spike.

During times like today when markets are volatile, remember that every CMBS lender’s application includes a Material Adverse Change Clause, or MAC Clause whose general language states: “At any time before funding the loan, the lender shall have the sole discretion to modify or not fund the loan based upon factors including the real estate or financial markets that could be expected to cause the loan to become delinquent or to adversely affect the value, marketability or profitability of the loan or securities derived in whole or in part therefrom… .”

In practice, this means the lender can adjust the interest rate spread should market conditions materially change after your financing application submission. We have seen CMBS lenders referring to this clause in rare instances where spreads have widened and the lender will, or is likely, to lose money on the transaction. When interest rate spreads widened this past June, several CMBS lenders cited that the market materially changed and invoked upward adjustments to our clients’ spreads. We were able to keep these increases to a minimum as the lenders respect our on-going knowledge of the capital markets. Having a mortgage broker help you navigate fluctuating market conditions and lending requirements is very helpful.

Finding a Knock-Out Deal

CMBS financing provides a relatively low interest rate alternative and CMBS financing will continue to be the best and viable option for many self storage owner in the coming years. And because of the continued performance history of the self storage sector, CMBS lenders will be eager to provide as aggressive terms as any other property type.

Finding the best CMBS lender to provide you with a knock-out financing package can be challenging. More than 35 CMBS lenders currently compete for storage customers, with most transactions arranged through intermediaries or mortgage brokers because CMBS firms employ limited origination staffing and rely on brokers to package and secure loan requests. This is particularly true with self storage because: 1) Our industry has a highly fragmented ownership base, and 2) Storage loans are much smaller than those for office, retail, hotel and multifamily properties.

Shopping your financing request to CMBS lenders requires experienced brokerage support to successfully deliver the transaction to the closing table. But in doing so, you will be able to raise your arms in victory with a long-term, fixed rate, non-recourse loan that helps you achieve your business goals.

With more than 23 years of experience as a national self-storage mortgage broker and advisor, Neal Gussis is a Principal at CCM Commercial Mortgage, where he specializes in securing debt and equity for self-storage owners nationwide. During the past 12 months, CCM has secured more than $170 million in customer financing. Based in Chicago, he can be reached at 224-938-9419 or ngussis@CCMCommercialMortgage.com.