CMBS Financing: A Solution to Commercial Real Estate Lending Challenges for Self-Storage Investors and Owners

Self-storage investors and owners have recently encountered significant hurdles when securing loans from traditional lenders like community and regional banks. These once reliable sources of financing have scaled back their lending due to tighter regulations and a shrinking base of deposits. The collapse of Silicon Valley Bank and Signature Bank in 2023 exposed deeper problems in the sector.

Regulatory pressures have added to the strain. The Office of the Comptroller of the Currency (OCC), which oversees national banks, has pushed for stricter lending standards and higher reserve requirements to reduce their risk. As a result, many banks have tightened their lending criteria or pulled back from commercial real estate lending altogether.

Some credit unions continue lending, even to new customers, but with limitations, as they’re restricted by loan-size caps, geographic constraints and strict loan terms. For example, cash-out refinancing, which allows self-storage operators to extract equity from their properties, is rarely offered.

Another challenge is the loan-approval process. Because smaller credit unions may need to “club up,” which means pooling resources to fund larger deals, multiple institutions end up involved in the same loan. This adds more credit officers, each with their own risk tolerance, which can slow approvals and make it harder to get a loan finalized.

Some self-storage operators built strong relationships with traditional banks during more favorable economic times, giving them access to loans when they needed them; but even those connections are becoming less reliable. With shrinking deposits, tighter regulations from the OCC and growing concerns about risk, many are now hearing from their lenders that they’ve hit exposure limits, meaning the bank won’t issue any more loans to them at this time.

As a result, self-storage investors and owners are forced to explore alternative loan options, and many are turning to commercial mortgage-backed securities (CMBS). Unlike traditional loans, these are issued by investment banks and then sold as securities, allowing them to avoid some of the regulatory hurdles that have made it harder for banks to lend. Let’s look at how this financing may help you access cash, reduce risk and build sustainable growth strategies in today’s tough lending environment.

The Advantages of CMBS Loans

CMBS financing offers several key advantages to self-storage borrowers. One of the biggest is lower costs. These loans are typically linked to Treasury yields, which are generally more favorable than the prime-based benchmarks many banks use. This difference can result in meaningful savings, especially for stabilized properties that are already producing steady income.

Another benefit is flexible terms. Many borrowers can secure full-term interest-only loans, which lowers their monthly payments and improves cash flow. This can boost their return on equity, a valuable advantage in a high-interest-rate environment.

CMBS loans also make it easier to do a cash-out refinance, which allows you to pull equity from a stabilized property without having to sell it, freeing up funds to buy new facilities or invest in development projects. This eliminates the need for a construction loan, which can be costly and hard to secure today.

Another key advantage is CMBS loans are nonrecourse. This means they’re secured only by the property itself. If a borrower defaults, the lender can’t go after the their personal assets. For self-storage operators, this provides valuable protection and helps reduce personal financial risk. It’s an especially important feature for larger operators and those thinking about long-term estate planning.

If you have a diverse portfolio, CMBS loans also offer scalability. The minimum loan amount is typically around $4 million, but you can bundle multiple properties into a single loan to meet that threshold. This makes it easier for owners with several smaller self-storage facilities to access this type of financing.

Drawbacks of CMBS Financing

CMBS financing comes with certain drawbacks, such as higher closing costs and complexity; however, these challenges can often be mitigated by working with an experienced loan professional.

Be mindful of prepayment penalties like yield maintenance and defeasance, which can be substantial if you want to pay off the loan early. Thankfully, these costs are often offset by long-term benefits including lower interest rates and increased financial flexibility.

Some self-storage operators cycle between local bank loans for initial construction or value-add purchases and CMBS loans for refinancing once their property is stabilized. By paying off the existing loan through CMBS financing, they free up borrowing capacity with the bank, giving them more flexibility to finance future development. Combined with the ability to pull cash out through refinancing, this strategy allows them to grow faster. This sustainable growth model helps them recover their original investment, maintain liquidity and manage risk.

In today’s challenging commercial real estate lending market, CMBS provides a valuable pathway for self-storage investors and owners to achieve growth and financial stability. With traditional lenders scaling back, this isn’t just a borrowing alternative, it’s a strategic advantage.

Gregory J. Porter is the founder of Summit Real Estate Advisors, a New York-based mortgage brokerage specializing in self-storage properties. He’s a 20-year lending veteran with commercial mortgage-backed securities lenders such as Deutsche Bank and JP Morgan, where he was a senior underwriter. He also served as the chief underwriter at Barclays PLC, with a $100 million signature authority. He has approved or originated more than $800 million in self-storage mortgages. To reach him, call 917.701.5145 or email [email protected]

About the Author

Gregory J. Porter

Summit Real Estate Advisors, Founder

Gregory J. Porter is the founder of Summit Real Estate Advisors, a New York-based mortgage brokerage specializing in self-storage properties. Gregory is a former, 20-year lending veteran with CMBS lenders such as Deutsche Bank and JP Morgan where he was a senior underwriter. He also served as the chief underwriter at Barclays PLC, with a $100 million signature authority. To reach him, call 917.701.5145; e-mail [email protected].

See more from Gregory J. Porter

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