Self-storage CMBS performance shines through pandemic impact

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The performance of securitized loans backed by self-storage properties has carried well during the COVID-19 outbreak, which otherwise has caused problems for other major sectors of commercial mortgage-backed securities including hotel/hospitality and flexible office space.

In researching September trustee remittance reports, Trepp CMBS research found only three of 1,700 self-storage commercial mortgages in deals tracked by the firm were marked delinquent as of September, for a “negligible” delinquency rate of just 0.14% among those $16 billion in loans.

(The largest of these delinquent loans — a $14.7 million mortgage for a 433,350 square foot property in League City, Texas — fell behind due to an October 2019 fire that caused over $600,000 in damage and placed 42 units offline, according to Trepp.)

Additionally, the rate of self-storage loans in special servicing, which has stayed below 1% in recent years, was at just 0.02% for September. (The special servicing rate was 10.48% for CMBS overall.)

“The demand has increased due to the pandemic and its impacts,” according to a recently published report by Trepp. “While the last six months have seen high overall CMBS delinquency rates, especially catastrophic for hotel and retail CMBS loans, self-storage CMBS loans have seen little impact.”

The universe of self-storage CMBS loans is small, representing just over 3% of the $500 billion-plus in outstanding private-label CMBS. But analysts say self-storage properties have a reputation as a safe-haven asset for CMBS investors, even during times of instability within the CRE industry. During the peak of the financial crisis, delinquency rates for self-storage properties peaked at 4.56% compared to the overall CMBS delinquency rate of 9.27%.

Self-storage tends to be recession-proof by the consistent demand from customers dealing with major life events (divorce, moving or a death in the family) that occur regardless of macroeconomic conditions.

The coronavirus outbreak itself has created more demand for self-storage spaces in a couple of major ways, said Yousuf Hafuda, a real estate equity analyst for Morningstar.

Many single adults, particularly millennial professionals living in large cities have turned to self-storage units as they downsized or leave large cities to work remotely in markets with a lower cost of living, he said. The still-thriving single-family housing sector is also spurring more self-storage usage for transitional families moving into new digs.

Units also become more popular with small-business owners who need to store work equipment or extra inventory, who see self-storage units as more cost-effective than leasing larger spaces, said Luke Elliott, an executive managing director at Cushman & Wakefield, who works with the firm’s national self-storage advisory group.

Companies such as cleaning services, retailers and restaurants often turn to self-storage, Elliott added.

Over the last five years, the self-storage industry has been booming, with construction spending on new units soaring 582% between 2015 and January 2020, according to Trepp.

What has made them strong CMBS assets involve high margins and relatively low debt levels. The average debt-to-service coverage ratio is 2.11x, per Trepp, with an average loan-to-value ratio of 62.9%.

Hafuda said self-storage properties with annual revenues of about $39 billion produce higher net operating income margins (60% to 70%) than other real estate asset types that tend to have higher service-intensive needs than self-storage properties.

Property ownership of self-storage units is stable and diverse, with 20% of the market controlled by the five largest operators organized as real estate investment trusts (Public Storage, Extra Space, CubeSmart, Life Storage and NSA). Many of the REITS went through an acquisition spree in recent years, but that has slowed due to economic uncertainty driven by the coronavirus pandemic.

Shares in self-storage REITS have outperformed other sector REITS this year: for the period ended Sept. 30, 2020, self-storage REITs had a total return of 3.65%, according to data from the National Association of Real Estate Investment Trusts. All other REIT sectors saw negative returns, except infrastructure REITS, which had a return of 0.28%.

Although 2020 construction starts are down in year-over-year comparisons due to COVID-19-related constraints on lending, the industry has seen rapid growth and expansion over the past five years. According to Trepp, construction spending soared 582% between 2015 and January 2020.

That led to a record level of CMBS issuance of bonds backed by self-storage units last year, topping $3 billion compared to just $100 million in 2010. The market has taken a sharp fallback this year to just $322 million, however.

“You might read one article saying self-storage is not living up to its hype, and another saying a negative analysis is just because of discordant notes,” Hafuda said. “I think it all nets out.”

The construction slowdown has less to do with the current economy and more to do with the oversupply in many markets, said Elliott. “New builds are down because supply has increased in many markets creating oversaturation.

"New builds were already decreasing pre COVID, but the constriction of construction lending has continued the trend."

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