Publication X

By Michael McCune
Argus Self Storage Sales Network

Falling Interest Rates - That’s Good, Right?
So Why Aren’t We Smiling?

First, a brief primer on how most of the long term lending gets done in self storage today. Almost all of the long term loans (5 years and up) are generated by firms that package up your loan with loans of other borrowers for all types of real estate, and sell them on Wall Street through a vehicle called commercial mortgage-backed securities (CMBS). Once your loan is combined with other loans in a large package (usually in the hundreds of millions of dollars) one of the Wall Street firms “chops” up the package into several tranches or parts, usually three, then sells them to investors. Each tranche represents a different level of risk, based on the priority of the principle and interest payments coming from the entire pool of loans. Thus, the first level has the greatest security and the lowest return, the second tranche has more risk and a higher return, and the last tranche has the highest risk and possibly the highest return, but it is very speculative. Going through all of these gyrations has made the whole package more attractive to investors and generally broadened the investor market, and thus, has also made lending easier and cheaper for the borrower. The CMBS system has worked very well in recent years and has allowed great access to the credit market for all types of real estate, including self storage.   

So, why if the system works so well, are interest rates dropping, but the cost of financing going up? First, the stock market and the international financial situation has made investors in general very nervous. Investors are thinking, “Do I really want to lend my money at these low rates for such a long period of time?” Also contributing to the situation is that the group of potential second tranche investors has all but dried up because they believe that their level of security in the pool of loans does not justify the return. Another factor in this issue is that many of the packagers of these loans got caught with a large inventory of loans when the “music stopped”, and lost a lot of money before they could sell their loans to Wall Street.So, what now for the self storage owner? Despite the fact that interest rates are going down, rates on self storage loans are going up because the lenders are charging a larger spread (the difference between U.S. Treasury rates loan rates) to help compensate for the perceived risk. The really bad news is that many of the lenders are simply pulling out of the market and waiting to see what happens in the markets. Generally, those lenders that remain will not lock up a rate until closing, and the underwriting process (i.e. loan review) will be tougher than ever.   

If you are currently thinking about getting a loan, do not wait, as the general thinking among our friends in the financing business is that things are more likely to get worse before they get better. Likewise, if you are thinking about selling anytime in the near future and believe that your buyer may need a loan, now would be a good time to get started in the selling process. Since no one saw this coming, it is also clear that no one knows exactly what will happen in the future. We will do our best to keep you posted on what we know.

Whether you’re a buyer or a seller, if you’re looking to have a third party involved in the financing of your deal, be informed. For an indepth review of how this latest situation affects you, give your local ASSSN Affiliate a call.