Mele Storage Group Warns of Setback in CMBS market

From: Self Storage Promotions
Published: Thu Jun 07 2007

Marcus & Millichap's Mele Storage Group is warning investors that the commercial mortgage-backed securities, or CMBS market is experiencing a minor setback. Problems in the sub-prime residential mortgage market are adversely impacting the commercial mortgage market. CMBS lenders are even seeing some of their aggressively underwritten loans being kicked out of loan pools as the spread requirements of the bond investors are increasing, according to a recent report from BridgePointe Advisors, a real estate investment banking boutique based in Alphretta, Ga.

CMBS are securitizations of mortgage loans backed by commercial real estate. That makes CMBS similar to Mortgage Backed Securities (MBS), which are mortgage loans backed by residential loans. CMBS are not exactly a new financing phenomenon – it was created in the late 1980s – but this method has gained notable momentum in the self-storage industry. Essentially, CMBS are a means for investors to participate in the ownership of commercial mortgages. Apartment buildings, shopping or strip malls, office buildings, hotels, industrial buildings and self-storage, among other commercial property types, secure loans that serve as CMBS collateral.

"Some are calling the subprime problem the 'elephant in the room' and many investors are getting nervous about aggressive underwriting practices," said Michael A. Mele, Senior Investment Associate at Marcus & Millichap's Mele Storage Group. "This could be a blow to self-storage investors because the spreads had narrowed and CMBS was becoming an attractive long-term financing alternative."

A late February meltdown of the subprime market may have caused those once-attractive spreads to increase across fixed-income markets, according to BridgePointe. Current market conditions are likely to lead to more stringent loan underwriting requirements in the future. AAA investors who did not typically scrutinize the collateral of CMBS deals are now beginning to do so, and low-quality loans are being removed from the pool. The weakened quality of loan underwriting has restricted the percentage of CMBS bonds that qualify for the low-cost AAA ratings. The demand for credit-default swaps is rising, and, at the same time, the market is cooling to interest only loans.

"Call it a perfect storm," said Mele, who is also president of the Florida Self Storage Association. "Market conditions mean CMBS lenders could be looking at lower profits or even losses on their current loans. That requires an adjustment, but the good news is the CMBS market is not falling apart. News headlines tell of many big deals being done. Savvy investors will consider market conditions, though, when approaching new deals."

BridgePointe cites several implications for owners, sellers and investors. With the public market exposure of the commercial real estate market, for example, it is vital for owners and investors to monitor supply and demand factors in the overall capital markets arena because any disruptions will filter through to real estate participants.

"Lenders will be more conservative in loan underwriting, focusing less on projected income, increasing amortizations, and requiring more equity. As a result, borrowing costs will increase and available loan proceeds will decrease. As a seller, it is important to understand which lender your buyer is currently working with and the potential for a loan retrade," said Gary T. Sakaly, managing partner of BridgePointe Advisors, in his advisory.

Sakaly also noted that not all lenders are the same. The CBMS lending market is bifurcated. Some CMBS lenders are in better shape than others and less likely to increase spends, whereas others have significant exposure and will have to increase spends. Sellers, he added, should question investors whose pricing is dependent on an interest only structure.

"At the Mele Storage Group, we understand the lending markets and how they impact deals," Mele said. "Just as it's important to work with the right investment banker, it's important to work with the right self-storage real estate broker as the lending and self-storage markets simultaneously adjust to current market conditions."

About The Mele Storage Group
Led by East Coast Self Storage Specialist Michael A. Mele, The Mele Storage Group has sold over 70 self-storage properties totaling over $300 million in sales. Mele has over $150 million in Active and Under Contract listings and a database of approximately 5,000 buyers seeking to expand their self-storage portfolios on the East Coast. Mele closed more than $86 million in self-storage sales in 2006 alone. Each member of the group is a specialist in the fields of financial analysis, market research, contract management and marketing.

About Marcus & Millichap
With more than 1,100 investment professionals in offices nationwide, Encino, Calif.-based Marcus & Millichap is the largest commercial real estate brokerage in the nation focusing exclusively on real estate investments. In 2006, the firm closed more than $22 billion in transactions. Founded in 1971, the firm has perfected a powerful system for marketing properties that combines product specialization; local market expertise; the industry's most comprehensive research and analysis capabilities; state-of-the-art technology; and established relationships with the largest pool of qualified investors nationally.

PR Contacts:

Self Storage Promotions
Jennifer LeClaire
1913 S. Ocean Drive, Suite 237
Hallandale Beach, Fla. 33009

Mele Storage Group
Darlina Conto
7650 Courtney Campbell Cswy., Suite 920
Tampa, FL 33607
813.287.9777, ext. 187

Company: Self Storage Promotions
Contact Name: Jennifer LeClaire
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Contact Phone: 954.454.0072

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