Self-storage CMBS loan volume soared by 73 percent in 2015 compared to two years prior as investors are increasingly recognizing the value of the niche properties.
Specifically, $3.3 billion in commercial mortgage-backed securities (CMBS) loans were issued to self-storage properties in 2015 compared to $1.9 billion in 2013, according to data from Trepp.com.
There are a number of reasons behind the surge, according to industry observers.
End of term
Noel Cain, managing partner of BayView Advisors’ capital markets group, believes that a backlog of 10-year-fixed rate deals done in the mid-2000s is a big factor.
“If you look at it by volume there were a lot of self-storage deals done in that period that are now coming off those loans and are available to re-finance,” he said.
A flurry of new construction is also contributing, Cain points out.
“Not only is there a bunch of construction, you’re finding owners with increased value who want to improve their property, build or expand,” he adds.
Indeed, construction spending on self-storage facilities as reported by the U.S. Census Bureau increased more than 27 percent in 2014 over the previous year with $591 million in spending reported.
Self-storage facilities are increasing their presence in the commercial real estate world, Cain said.
“I don’t want to suggest they are in the same class as office buildings in Manhattan, but they have raised their reputation among other property types,” he said. “More people are allocating money from other real estate investments to consider storage.”
Sean Barrie, a research analyst with Trepp LLC, said overall, he has seen an increase in the issuance of CMBS loans over the past four years with most property sectors having seen growth.
“The self-storage sector has seen one of the higher percentage increases, along with the lodging sector,” he said.
The performance of self-storage REITs has also been a factor, Barrie points out.
“We have noticed that self-storage REITS have been boasting pretty good numbers,” he said. “That always helps.”
Also, more generally, Hill believes that the borrowers who have been in a very low rate environment for so long recognize that rates will be rising.
“They have a significant interest in locking in to the lowest possible rates for the longest possible time,” Hill said. “There are also a lot of investors that don’t want to sell but do want to take advantage of current cap rates and values to access trapped equity in their properties.”
Typical recourse bank lenders do not love to cash borrowers out, but CMBS lenders don’t have an issue with it, Hill said.
Neal Gussis, Principal of CCM Commercial Mortgage LLC, agrees with Cain that CMBS loan maturities and the overall current CMBS loan origination volume are factors behind the recent loan volume increase.
“Historically, self storage makes up two to three percent of total CMBS issuances,” Gussis said, “The 2013, 2014 and 2015 total CMBS issuances were $86 billion, $94 billion and $100 billion [estimated] respectively.”
Gussis cited industry analyses that predict total CMBS volume for 2016 to land between $100 billion and $125 billion.
“So the trend in storage seems to be in line with historical trends,” Gussis said.
The U-Haul bump
He also believes the large jump from 2014 to 2015 – from $2.15 billion to $3.3 billion – was primarily due to U-Haul securitizing a large amount of its portfolio in 2015. In July 2015, Amerco, the corporate parent of U-Haul, lined up two fixed-rate loans totaling roughly $575 million from three banks — Bank of America, J.P. Morgan and Morgan Stanley.
Looking ahead, Gussis estimates that self-storage CMBS volume will be above the $2.15 billion experienced in 2014 but below the $3.3 billion seen in 2015.
“Because self-storage is accepted by a historically high number of CMBS originators, we may see the percentage of self storage loans go up slightly as a percentage from historical levels,” he said.