Finance • Section 10
ment and strong self-storage performance metrics, an increased risk appetite from the lending community allowed self-storage owners to benefit from a bullish lending environment in 2014.
T
The Federal Open Market Committee (FOMC) has openly stated that as long as positive
economic indicators continue, the likelihood of raising the Federal Funds Rate increases.
Economic indicators such as manufacturing and housing
were strong in 2014, while consumer spending numbers were less clear. However, at the time of this writing the positive jobs report and decline in energy costs were expected to have a positive impact on consumer spending. On Oct 3, 2014 unem- ployment fell to its lowest level since July 2008 eclipsing the 6 percent benchmark, reported an article on
money.cnn.com. Factors such as the Federal Reserve’s policy to begin taper-
ing treasury purchases at $10 billion a month, the con- stant worry of a stock market correction, turmoil overseas bringing the U.S. Foreign policy under pressure, and the announcement of Janet Yellen as Federal Reserve Chair- woman kept the market on its toes on a month by month basis. Many of these macroeconomic and global influenc- es created overall stagnation in interest rates, a pattern that continued from 2013. It is inevitable that the tide of historically low rates
will eventually turn. The Federal Open Market Commit- tee (FOMC) has openly stated that as long as positive eco- nomic indicators continue, the likelihood of raising the Federal Funds Rate increases. More specifically, the FOMC stated in September that once the unemployment rate reaches 5.5 percent and inflation reaches 2 percent, pol- icy firming is definite with 14 of the 17 FOMC members idealizing a raise of the Federal Funds Rate to 1 percent or higher. This major market decision consistently has been projected
100% 95% 90% 85% 80% 75% 70%
2011 4Q 2012 2Q 2012 4Q 2013 2Q 2013 4Q 2014 2Q Public Storage
Extra Space Source: MJ Partners Sovran CubeSmart
he floodgates of capital available to self-storage owners remained open in 2014 as the economic rebound contin- ued. Combined with a historically low interest rate environ-
and as of September 2014, it was already 13 percent higher than the prior year. Also, as proxy of the health of the commercial real estate markets as a whole, CMBS delinquency rates shrunk 15 out of 16 months from May 2013 to September 2014. The increased lending competition benefits borrowers in the form of lower overall interest rates, more liberal underwrit- ing standards than 2013, and higher overall leverage. In August 2014, Huxley Somerville, Fitch Rating’s head of U.S. CMBS stated in the Commercial Observer, “There is a sign in some respects that the buoyancy, liquidity, and demand for the product in the market is causing the decline [in underwriting standards].” Self-storage metrics continued to improve from prior year
with growing occupancy rates, allowing owners to raise rents. According to MJ Partners, all four of the Self-Storage Public REITS reported physical occupancies above 90 percent as of 3Q 2014. Equally, these operators are continuing to raise their rental rates on a quarter-by-quarter basis with street rates 4.6 percent higher in 3Q 2014 than the previous quarter. Although these metrics are not reflective on the national
level for the asset class, the performance of the Public REITS is regarded as a lead indicator for the state of the industry. Going forward, we expect volatility in the global economy to directly impact commercial real estate lending and interest
Chart 10.1 – REIT Quarterly Occupancy
Chart 10.2 – Capital Stack
to occur in the middle of 2015. As the Fed continued to scale back its bond purchases, inflation inched from its 1.5 percent in the beginning of 2014 closer to 2 percent in the latter part of the year. The announcement that the Fed will hold onto its $4.48 tril- lion balance sheet since the inception of Quantitative Easing in November 2008 shows that the central bank wants to cooperate with the market as much as possible in order to limit volatility, as reported by Bloomberg in October. As a result of this action, increases in interest rates may be tempered as they do occur. Last year was also one with unprecedented lending compe-
tition that primarily held spreads constant and in some cases, tightened from levels witnessed in 2013. As a barometer of lend- ing, the total CMBS issuance reached over $86 billion in 2013,
Sponsor Equity
Preferred Equity
Mezzanine Investors First Mortgage (Senior Debt) 2015 Self-Storage Almanac 99
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