Section 12 • Finance
opportunity to take advantage of SBA programs that are able to underwrite the real estate and associated self-storage income.
CMBS Commercial Mortgage Backed Securities are bonds backed by commercial mortgages. As of September 30, 2015, U.S. CMBS issuance was up approximately 12.7 percent across 113 deals when compared with the same period in 2014—on pace to re- cord its highest post-2007 volume.
A CMBS transaction involves lenders originating loans with
the explicit purpose of packaging them together with other loans in order to sell bonds backed by the income stream from the mortgage payments. After a loan is securitized and the bonds are sold to the investment community, capital is returned to the lender. Lenders can then redeploy that capital and make more loans. Capital flows efficiently between borrowers, lend- ers and investors, and hence the name “conduit” is given to lenders using these financing approaches.
CMBS lenders offer non-recourse loan products, typically
with five-, seven- or 10-year fixed-rate terms, and amortization schedules up to 30 years. These loans commonly feature upfront interest-only periods. Borrowers can achieve leverage up to 75 percent or even 85 percent for loans over $10 million, when combined with mezzanine debt.
CMBS lenders are among the market’s most aggressive;
thus, 8 percent debt yield minimums aren’t uncommon as they stretch for deals with strong cash flow growth potential. Like most lenders and investors, CMBS lenders prefer large, primary- market deals because of the liquidity in those markets, but they also compete for loans as low as $1 million in secondary or even tertiary markets. This is especially important for self-storage owners, as many transactions are in the sub $5 million range. In Q4 2015, 10-year CMBS rates are hovering in the mid-4.0 percent range.
Chart 12.5 – Commercial Real Estate Debt Outstanding Banks and Thrifts 36.9%
CMBS, CDO and Other Issues 19.5% Agency & GSE Portfolios and MBS 16.1% Others 13.8%
Life Insurance Companies 13.7% Source: Investor Group
CMBS interest rates are calculated by adding a risk spread premium to a benchmark index known as the Swap Side offering, instead of the applicable Treasury bond. For example, a 10-year rate is found by adding the lender’s risk spread premium to the 10-year swap; therefore, if spreads are currently in the 2.5 percent range (250 basis points), and the 10-year swap at 2.0 percent, the applicable rate on 10-year CMBS money is 4.5 percent (2. 5 percent + 2.0 per- cent = 4.5 percent).
CMBS 10-year, new-issue spreads jumped Chart 12.6 – Worldwide CMBS
100 90 80 70 60 50 40 30 20 10 0
J
Year-to-date volume ($Bil.) 2015
2014 US
Non-US TOTAL
88.6 79.9 5.2
93.8 4.5 84.4 2015 2014
slightly in the beginning of Q1 2015, before making a slow, steady dip through Q2. Since that time, spreads generally widened, espe- cially in August through September, largely due to supply of CMBS bonds in the market and broader concerns in the capital markets unrelated to U.S. commercial real estate. Trea- suries (and the linked swap rate) generally hit a 12-month low in the middle of Q1 2015, before reaching 12-month highs at the begin- ning of Q3 2015. Even with this movement, in- terest rates remain at historic lows.
CMBS loans are often criticized for restric- F MAM J Source: Commercial Mortgage Alert 126 Self-Storage Almanac 2016 J A S ON D
tive prepayment options, limited to yield maintenance or defeasance. Costs to bor- rowers with these prepayment options are often higher in a declining interest rate en- vironment and lower in a rising interest rate environment. It is unlikely that we will be in a declining interest rate environment; however, borrowers should understand the implica- tions of each prepayment option.
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