A wave of CMBS loans are coming due over the next three years, and it couldn’t come at a better time for the self-storage industry.
Nearly $6 billion worth of 10-year self-storage CMBS loans are set to mature between 2015 and 2017, according to figures from mortgage data provider Trepp.
This year, $1.8 billion worth of self-storage CMBS loans will come due, Trepp says. In 2016, the volume will peak at $2.4 billion before dropping to $1.7 billion in 2017. In all, nearly 1,300 self-storage loans will come due over the three-year period.
“Refinancing that volume is not going to be an issue at all,” said Jim Davies, principal of self-storage lending firm Talonvest Capital.
Environment strong for borrowers
Barring an unforeseen geopolitical or financial crisis, strong demand from both lenders that back CMBS loans and from investors who put their money into CMBS should continue, Davies said.
CMBS loans are unique in that after they’re made to the borrower, the loans are bundled with other loans and sold to investors as securities.
About 40 CMBS lenders are active in the self-sector, Davies said. In addition, many financing sources are available to operators aside from CMBS, such as life insurance companies, national and regional banks, and credit unions.
We have a few clients who did their loans with us 10 years ago who have been seriously considered selling.
— Jim Davies, principal of Talonvest Capital
“When we represent a client in the marketplace, most of whom are midsize or large owner-operators, there are typically about 25 different lenders who we put in competition with one another for that owner’s business,” Davies said.
Thanks to the competitive market for financing, Talonvest is closing 10-year non-recourse loans in the mid-3 percent range to the low 4 percent range, Davies said.
With more loans coming due, Davies said, the number of inquiries his firm is fielding is on the rise. “The phone calls are increasing each quarter from owners whose facilities we financed 10 years ago,” he said.
Time to decide
Self-storage operators with loans coming due find themselves at a major crossroads: sell or refinance. The strong environment for both options makes it a tough choice for some.
“We have a few clients who did their loans with us 10 years ago who have been seriously considered selling. However, most haven’t made that decision yet,” Davies said.
On one hand, there’s a “historical window” for sellers to take advantage of extremely low cap rates for self-storage facilities and receive a big payout if they sell. On the other hand, refinancing into a new 10-year loan with favorable terms and low interest also is attractive. Those who do sell face the challenge of finding another investment that will give them the same cash flow and ROI.
Davies said he has a couple of clients who are looking at selling in the next two years but have decided to refinance — making sure “multiple assumptions” are part of the loan terms.
“Their thinking is if they if they do decide to sell, they have attractive financing that might make their property even more desirable,” Davies said.
Instead of a buyer taking out a loan, he or she can assume the seller’s existing low interest loan. Multiple assumptions allow yet another buyer to take over the loan as well. One drawback to assumptions is that it can take as long as four to five months to complete them.
“You can negotiate with lenders to get multiple assumptions, no problem,” Davies said. “Some people may not ask, but we always make sure our clients get that.”
Looking at the options
Shawn Hill, principal of Chicago-based self-storage lending firm The BSC Group, said the healthy climate for self-storage gives numerous options to owners with loans coming due.
“The valuations of self-storage properties do have a lot of people’s attention. People are wondering if they should sell. Then they have to weigh that against what they are going to do with the money,” Hill said.
They also must consider paying taxes on proceeds from a sale, Hill said.
One option available to some borrowers is to refinance and then tap into the property’s equity.
“It is like selling without selling,” Hill said. “You have capital you can reinvest to build deals, and you still own the asset. We fee like that is a great position to be in.”