Financial Facts • Section 12
ues, knows no borders, and does not discriminate; this is clear from its global impact. In the United States, the pandemic shut down the country for an extended period. Commercial real estate may not have been the hardest hit sector, but it was certainly impacted. Some of the most common capital sources for borrowers were profoundly disrupted. For exam- ple, the CMBS market shut down completely for two months and the field of active bridge lenders shrunk significantly. Thankfully, both have since rebounded in various forms, and all is not lost for borrowers as we move into 2021. As we go to press, the results of the presidential election are still being disputed, with ballot recounts occurring in several key states, the re- sults of which could set an entirely different course for our country. 2020 has been a difficult year, but this much is true: Self-storage continues to exhibit resiliency as a product type. The industry fared well through extended economic uncertainty and rose to the challenge of adapting to new safety precautions for a post-COVID world. As such, storage remains a golden child in the eyes of many lenders.
B Despite a temporary shutdown, the capital mar-
kets continue to service self-storage, as do local and regional banks, insurance companies, and several other sources. This section will review a host of debt products available to self-storage borrowers looking to the future. The goal is to consider where the debt markets are at the end of 2020 and to provide a solid framework for would-be borrowers to consider as they make decisions going forward. Both the domes- tic and global economies continue to influence the financial markets. Still, in many cases, interest rates remain near historic lows and there is optimism sur- rounding the availability of debt products in 2021. First, a note about the Federal Government’s role in setting the Federal Funds target rate, a benchmark rate also known as the interbank overnight rate.
The Federal Open Market Committee (FOMC) is
tasked with maintaining the Federal Funds rate tar- get. In the wake of the last recession, rates were held near zero to spur economic recovery. Finally, in De- cember 2015, rates were increased for the first time in a decade. This milestone was followed by several hikes until 2019, when the Fed reversed course and began lowering the target. In March 2020, at the onset of the pandemic, the Fed cut the Fed Funds target rate to its current level of 0.0 to 0.25 percent, a precedent which will likely be maintained for some time.
2021 Self-Storage Almanac 113
eginning in early March, it became clear that 2020 was not going to be a normal year. The relentless COVID-19 pandemic, which contin-
Among other intangibles, the Fed based its decision on a two-
pronged mandate revolving around unemployment and inflation. This mandate included a target unemployment level of around four percent and inflation above two percent. After years of historically sub-four percent unemployment, jobless claims and the unemploy- ment rate skyrocketed as a result of the pandemic. In the period immediately after COVID started, unemployment rose sharply to over 14 percent before returning to below eight percent at the time of this writing. Meanwhile, inflation hit a level near zero percent and has since rebounded to around 1.3 percent. In other words, condi- tions exist such that the Fed plans target near zero percent interbank borrowing rates until further notice.
Despite the impacts of COVID-19, outstanding commercial mort- gage debt increased to $3.76 trillion in the second quarter of 2020, notching another all-time high. The breakdown of outstanding com- mercial mortgage debt is detailed in Chart 12.1 according to the Quarterly Databook.
Self-storage operating fundamentals remain strong in 2020, al-
beit not without some softness. In mid-October 2020, softness was not only related to the glut of new supply delivered to the industry in recent years but also related to the COVID-19 pandemic’s impact on commercial real estate. Per a Q2 2020 self-storage market overview report prepared by MJ Partners, the REITs reported occupancies near all-time highs to end the quarter, ranging from 91.1 percent to 94.5 percent. However, this was due in large part to pausing auction activ- ity and limiting stringent move-out procedures. In fact, MJ Partners further stated that all the REITs reported negative same-store reve- nue growth ranging negative 3.1 percent to negative 1.1 percent, the first time this has happened since the last recession.
New construction impacts the whole market, but recently built and under construction assets are more vulnerable to their own exis- tence than stabilized assets (with some exceptions). This has created
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