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Interest Rate and Construction Concerns

Written by: Neal Gussis Posted: 11/15/2016
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The result of the recent presidential election took most of the nation by surprise. The instability in the financial markets will likely affect the volatility of interest rates. In the self storage real estate sector, there are also signs of change in the availability of new construction financing and refinancing based on the amount of new construction already slated.

Movement in Interest Rates

There are indications the Fed will continue to monitor economic conditions in gradually raising the Federal Fund Target Rate which has direct impact on short-term rates. The timing of any Fed rate increases are now in question based on the election results.

Long-term rates are tied to additional factors such as global economics, inflation, supply and demand, and, yes, the outcome of elections. Since the election results, the 10-year Treasury has increased .35%. If there was ever a time where it was nearly impossible to predict future direction of rates and how much they can fluctuate, it’s now.

Availability of Construction Loans

There has been significant number of development and construction loans, not only for self storage projects, but in other commercial real estate sectors as well. In securing construction financing for our clients we are starting to see more lenders turning away construction loan requests due to the amount of construction loans already in their pipeline. We expect this trend to continue into the coming year.

New Construction Hitting Home

For the past quarter results, the REITs are starting to report to analysts that the velocity of rental increases are slowing and concessions on new customer rentals are increasing. These trends may cause lenders to be more cautious with loan terms and leverage. As a result of the self storage construction boom, we are now seeing lenders factor in new competition when underwriting acquisition and refinance loan requests.

We are entering a new era, not only on the political front, but also in the self storage arena as an increasing amount of new product comes on line. Because of the combination of the financial markets potential volatility and the increased supply and competition of additional self storage properties, expect that lenders may be more conservative and quotes and terms may vary widely.

About the Author

With 25 years of experience as a national self storage mortgage brokers and advisors, Neal Gussis and Steve Libert are Principals at CCM Commercial Mortgage, where they secure debt and equity for commercial real estate properties with a focus on self storage. For more information, pleae visit www.CCMCommercialMortgage.com

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