Section 16 • Finance CMBS lenders are aggressive and have historically been
a source of extremely compelling quotes for self-storage owners. CMBS loans allow borrowers to lock in competitive interest rates on a long-term basis; the debt is also assum- able. Both qualities are valuable potential hedges against rate increases. Because CMBS loans are securitized and, thus, do not have to live on an issuer’s balance sheet for years at a time, the product has been a great source of liquidity for commercial real estate borrowers. See Chart 16.5 below.
CMBS loans allow borrowers to lock in
competitive interest rates on a long-term basis; the debt is also assumable.
Both qualities are valuable potential hedges against rate increases.
Life Insurance Companies Life insurance companies are among the most conservative lenders in the commercial lending space. The typical insur- ance lender prefers to lend on very high-quality, stabilized assets in core markets. Furthermore, they tend to gravitate towards experienced, well-capitalized borrowers. Consider the goal of life insurance companies, which is to match assets for their shareholders/members. Thus, most prefer lower le- verage transactions that will suppress volatility during the loan term.
Life insurance company lenders are indeed selective, but the origination volume for this product type has been increasing each year since 2009. Per the MBA’s Quarterly
Chart 16.5 – Worldwide CMBS
100 90 80 70 60 50 40 30 20 10 0
J
Year-to-date volume ($Bil.) 2017
2016 US
Non-US TOTAL
79.7 61.8 0.7
1.7 80.4 63.5 2017
Databook, originations totaling $32.64 billion for the first half of 2017 are up one percent over the same period last year. This also marks the highest first half origination for the prod- uct type historically. Life insurance company debt currently accounts for 14.6 percent of all outstanding commercial/mul- tifamily mortgage debt, up from 14 percent a year earlier. As previously mentioned, life insurance company mortgage debt inched ahead of the “CMBS, CDO, and other ABS issues” investor group for total share of outstanding commercial/ multifamily mortgage debt.
Life insurance companies are notorious for stressing cash
flow underwriting and capitalization rates applied to derive value, typically resulting in loan advances limited to 65 per- cent of the actual value of the asset. Life insurance companies have historically preferred larger loans ($5-plus million), but the current competitive landscape has encouraged some to stretch for smaller deals.
Regarding loan term, five-, seven-, and 10-year fixed-rate
terms are most common, but fully amortizing structures up to 25 years may be available. Life insurance companies fea- ture reasonable transaction costs and will generally offer flexible prepayment options. Life insurance companies can also offer an interest rate lock at application, if they choose to do so.
Because life insurance companies tend to be more con-
servative, the spread premiums on these loans can be more attractive than those from other lenders. The result is that life insurance companies can offer among the lowest inter- est rates available in the market, depending on structure. The good news for self-storage owners is that the asset class con- tinues to report robust fundamentals and generate strong returns for investors. If this holds true, life insurance compa- nies will continue to be an excellent capital source for the right self-storage borrower.
2016
Construction And Land Loans The self-storage industry is experiencing a staggering construction boom, which follows in the wake of years of dormant construction during the most recent reces- sion. As discussed previously, a large stock of properties is coming on line this year and the next. The public REITs are projecting that peak new supply will occur in 2018 and that new supply has been most impactful in the top 25 MSAs.
A local or regional bank is the most likely F MAM J Source: Commercial Mortgage Alert 164 Self-Storage Almanac 2018 J A S ON D
capital source for a developer with a viable construction project. Construction loans are riskier than other debt products by nature, because there is no cash flow during the
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