Financial Facts • Section 12 The relative position of the stakeholders within the capi-
tal stack changes with the passage of time. As the mortgage principal is paid down, equity increases, and vice versa. First mortgage debt has priority to cash flow and is easily quantified as the unpaid loan balance. Sponsor equity is subordinate to most debt. The value of sponsor equity can be calculated by subtracting the value of the higher priority positions from the asset’s total value. The required rate of return increases as one moves up the stack, most notably based on the correspond- ing level of risk for that position. For example, mezzanine and equity pieces demand a higher rate of return and are more ex- pensive than first mortgage debt.
The amount of equity that a sponsor holds in a real estate
asset is important to a lender. A borrower with little or no eq- uity stake in a property may have different interests than one with equity remaining in the deal, especially in the eyes of the lending community. This does not discount long-term own- ership where capital investments continue to be made into property to support and increase value.
Mezzanine debt and preferred equity are available in the
market for larger transactions and extraordinary circumstances. The graphic shows these interests lodged between the senior loan and sponsor equity positions. These are riskier pieces than the senior debt position and command higher interest rates. It is also worth noting that non-money-center capital sources, or debt funds, have come into focus in recent years.
First Mortgage Debt It should not come as a surprise that commercial mortgage originations were stunted through the second quarter of 2020, reporting a 48 percent decline compared to a year ago; more- over, Q2 2020 was down 31 percent over Q1. The accompanying origination index graphic depicts quarterly volume using 2001 as a baseline. Originations hit a cyclical peak in 2007 and have been on the mend in step with the economy since the reces- sion ended. Given the global pandemic, 2020 looks different than in recent years. However, if circumstances improve into 2021, storage fundamentals and interest rates remain extreme- ly competitive.
The volume of outstanding commercial mortgage debt sat
at $3.76 trillion at the end of Q2 2020. The banks and thrifts category continue to hold the largest share of outstanding commercial and multifamily debt. Total U.S. CMBS issuance reached a post-recession peak in 2015 with $95 billion, before notching respectable, albeit lower, total issuance between 2016 and 2018 ranging from $68 billion to $86 billion. 2019 hit another post-recession peak with issuance near $97 billion, the highest since 2007. Enter COVID-19, and through nine months of issuance, 2020 lagged behind 2019 by more than $16 billion. Still, there is optimism that the fourth quarter will be strong and the year may not be as suppressed as the early stages of the pandemic might have suggested.
CMBS (30+ days)
Life Companies (60+ days) Banks & Thrifts (90+ days)
Source: MBA Databook Self-storage still reports favorable delinquency trends
among its peers, outperforming all other property types. Per data from rating agency DBRS Morningstar, the delinquency rate for self-storage in the CMBS market peaked at 5.9 per- cent in 2011. As of September 2020, this figure was reported as 0.24 percent, well below other property types (the clos- est being healthcare at 0.29 percent). Although no asset is recession-proof, industry experts have long speculated that self-storage is as close as it gets. Time will tell if this holds true, but storage enjoys demand drivers that work well in both good and bad times.
Construction And Land Loans The self-storage industry has experienced an astonishing construction boom in recent years. A glut of new develop- ment came on line following years of dormant construction during the last recession. Although peak new supply was de- livered in 2018 and 2019, new construction activity in 2020 did not dwindle as much as expected considering the pan- demic. Pre-COVID, lenders were already being quite selective on which deals to underwrite and ultimately fund. Given the events of the last few years, it is more important than ever to have a well-thought-out project.
A local or regional bank is the most likely capital source
for a developer with a viable construction project. Small Busi- ness Administration (SBA) lenders also provide construction financing, and some debt funds will finance construction for the right borrower and deal profile.
2021 Self-Storage Almanac 115
9.60% 2.46% 0.15% 0.04% 0.64% 0.46%
Focusing briefly on delinquencies in the time of COVID, the trend of decline reversed from recent years. The story since the height of the last recession was one of generally decreasing delinquency rates. As evidenced below, delin- quency since COVID has spiked quite dramatically, with CMBS up to 9.6 percent in Q2 2020 compared to 2.46 percent in Q2 2019. Similar upward trends occurred in Life Insurance Company loans and Bank and Thrifts, as detailed in the lend- er delinquency rates table below (Table 12.1) from the MBA Q2 2020 Quarterly Databook. The Quarterly Databook graph on page 116 highlights delinquency for lender types com- pared to the range dating back to 1996.
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