Since the meltdown of the subprime market and its domino effect on the commercial lending markets (conduits in particular), the availability of loan dollars and variety of lending options has been significantly reduced. While financing is still available, the desire to maximize loan dollars for both construction and permanent loans is being met with much resistance from the lending community. The availability of better rate loan programs is harder to find, especially in non-metro areas, for unstabilized properties and higher loan-to-value (LTV) requests.
The Wall Street conduit market has all but gone away. Those remaining are requiring spreads approaching or above 400 basis points (4 percent) over the Treasury. With the conduit departure, there is no reason for banks and insurance companies to reduce spreads to the extremely low level previously offered by Wall Street in order to compete. As such, they have gone back to traditional loan margins to provide the yields required to be profitable or to better a yield found in safer investments such as corporate bonds.
Since departing, the multibillion-dollar conduit financing vehicle has left a huge void in the ability to finance self-storage properties, not only at high LTVs and long amortizations with interest-only components, but also as important on a “non-recourse” basis. The non-recourse financing has fallen on the shoulders of the insurance companies (IC) and pension funds (PF), both of which are known for cherry-picking properties and underwriting conservatively.
One of the biggest drawbacks to this remaining non-recourse financing source is the higher minimum loan amounts many IC and PFs require. In addition, not every IC and PF will work with self-storage—especially if it is not a class-A facility or constructed of metal. Many lenders have already filled up their “lending buckets” for the year with more preferred property types such as apartments, anchored retail centers and multi-tenant industrial.
In some cases, insurance companies also prefer to buy existing unsecuritized conduit product off the conduit’s books at a discount rather than fund new originations, further diluting the available funding pool. By buying stabilized conduit product with impounds typically held by the servicer for tenant improvements, leasing commissions, replacement reserves, taxes and insurance, and by cherry-picking the better properties from the portfolio, the insurance companies more or less guarantee themselves a good product on book with stiff prepayment penalties should the borrower pay the loan off early.