Losses on CMBS loans backed by self-storage facilities ticked up in 2013, but the sector remains the most resilient property type overall.
CMBS loans across all property types liquidated in 2013 had a loss severity of 46.3 percent, the highest percentage in a decade, according to a recent report by Moody’s. The percentage measures the amount of principal lost when a delinquent property is liquidated. The loss severity in 2012 was 40.1 percent.
Bigger losses for self-storage
For the self-storage sector, loss severity reached 42.4 percent in 2013, up substantially from 31.6 percent in 2012. A total of $53.6 million in principal losses were incurred from liquidated self-storage CMBS loans in 2013, less than the $62.5 million lost in 2012. The disparity shows that while the dollar amount of liquidation losses fell, those facilities that were liquidated in 2013 sold for a steeper discount.
Shawn Hill, principal of self-storage capital advisory firm The BSC Group, said he suspects the rise in loss severities stem from the “worst of the worst” self-storage loans being liquidated. For example, properties that are affected by bankruptcy or complicated ownership structures could have forced special loan servicers to hang on to them for a couple of years before ditching them, Hill said.
“When they finally traded in 2013, they ended up suffering a larger loss than those from previous years,” he said.
The amount of time a loan servicer holds onto a property also boosts the total loss because of the fees that are charged. “Those fees aren’t cheap,” Hill said.
One extreme example of a self-storage portfolio that sold for much less than the outstanding loan balance was in Philadelphia. Simply Self Storage bought four properties in 2007 for $30.5 million. That operator defaulted in January 2013. Andover Properties LLC bought three of those properties in January 2014 at auction for less than $3 million. With a principal balance of $24.8 million left hanging, the loss severity was 92.5 percent, according to a report released by TCW Group.
That’s an uncharacteristically high loss severity for the sector. On a cumulative basis, self-storage-backed loans have the lowest loss severity of any property type — 34.4 percent. That figure is based on $201.4 million in losses from 164 loans originated between 1998 and 2013.
Hill said self-storage-backed loans historically have not been battered for several reasons. For one, Hill said, self-storage properties weren’t prone to being overvalued during the peak of CMBS lending as much as other property types were, such as office and retail. Meanwhile, self-storage cap rates are significantly lower now than they were when the loans were initiated.
“Part of it is that storage is so much more attractive to people than it was before,” Hill said.
Multifamily property has the next-lowest loss severity, at 36 percent, while retail has the highest loss severity, at 49.4 percent.
In addition to having the lowest loss severity overall, self-storage-backed CMBS loans have the lowest delinquency rate among all property types.
The sector had a delinquency rate of 2.31 percent in 2013, according to data from Dominion Bond Rating Service. The next lowest delinquency rate was for loans backed by mobile home parks, at 4.87 percent. Unanchored retail properties had the highest delinquency last year — 10.61 percent.