Finance • Section 16 As


2017 comes to a close, it is once again time to re- flect upon what has changed since last year. No one can predict the future, but with a perspective


on where the capital markets have moved it will be easier to understand what 2018 might hold. 2017 has proved to be an- other interesting and historic year.


Both the domestic and global economy continue to in-


fluence the financial markets. The Federal Open Market Committee (FOMC) has implemented two quarter-point increases in the Federal Funds target rate as of this writing, with more rate increases projected for 2018. The London In- terbank Offered Rate, or LIBOR, a popular debt pricing index, is the subject of a massive price fixing scandal; as a result, the index will be replaced by the end of 2021. Finally, while natural disasters are not always a focus of the financial field, several major hurricanes that struck the U.S. are akin to fresh wounds. Nothing reinforces the importance of wind storm and flood insurance like a few catastrophic storms. These storms will surely impact total GDP growth in 2017.


Commercial mortgage origination volume in the first half


of 2017 was strong. According to data from the Mortgage Bankers Association’s Q2 2017 Quarterly Databook, commer- cial/multifamily mortgage originations were up 20 percent over the same period last year. As of Q2 2017, total outstand- ing commercial and multifamily debt reached a new high of $3.06 trillion. According to the Q2 2017 Commercial/ Multifamily Quarterly Databook, outstanding commercial mortgage debt breaks down as outlined in the chart below.


Operating fundamentals for the self-storage asset class


held strong in 2017, as evidenced by data compiled on the publicly traded self-storage REITs by MJ Partners. In their “Self-Storage Market Overview 2nd Quar- ter 2017” publication, MJ Partners cited the five publicly-traded storage REITs reported portfolio occupancies ranging from 91.4 percent to 94.6 per- cent, compared to a range of 92.1 percent to 95.4 percent a year ago. Portfolio revenue and net op- erating incomes generally continue to grow, albeit at a slower pace than in the last few years. While public REIT data does not definitively symbolize the health of the self-storage industry, it is a good proxy for industry trends.


Cap rates remain historically low and values,


therefore, remain elevated. As a result, borrowers may find maximum proceeds are not governed by loan-to-value (LTV), which is only one of sev- eral constraints lenders consider. Commercial real estate loans are sized-based on three key loan met- rics: LTV, Debt Yield, and Debt Service Coverage Ratio (DSCR). LTV is calculated as the Loan Amount divided by Value (LTV = Loan Amount/Value). Debt


2018 Self-Storage Almanac 159


yield is calculated as Net Operating Income (NOI) divided by Loan Amount (Debt Yield = NOI/Loan Amount). DSCR is cal- culated as NOI divided by Annual Debt Service (DSCR = NOI/ Annual Debt Service). Lately, it is common for loan proceeds to be constrained by DSCR or debt yield hurdles before max- imum LTV becomes a constraining factor. For example, an asset with a $10 million valuation may not be eligible for a $7.5 million loan (75 percent LTV) if the in-place cash flow only covers at a 1.00x DSCR, and/or the debt yield is below the prevailing market standard.


The self-storage industry is in the midst of a development


cycle; construction financing has been readily available over the past couple of years. Approximately 600 facilities were built in 2016, and it is estimated that as many as 900 new fa- cilities will be delivered in 2017. This level of new supply has not been seen in over a decade and will surely impact rental rates and occupancies in saturated markets. Lenders know this and have scaled back Loan-to-Cost (LTC) funding for new construction. In the last few years, the public REITs have been actively acquiring newly developed facilities, often facilitated by a Certificate of Occupancy (C of O) purchase. While C of O deals are still occurring, the pace has slowed significantly. Per MJ Partners, acquisition volume of the REITs is down 70 percent year-over-year.


The Federal Open Market Committee (FOMC) is respon-


sible for adjusting the Federal Funds target range, and their decision is always anxiously anticipated. Following the on- set of the recession, the target range was held near zero to encourage economic recovery. The economy did eventually begin to recover, but it was not until December of 2015 that the Fed increased the target rate to a range of 0.25 per- cent to 0.5 percent. At the time of writing, the FOMC had


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