For planning purposes, most owners need an approximate value for their facility. An uncomplicated formula can be used to determine one. (To get a value range, plug in your market’s highest and lowest cap rates in step 3.)
1. Storage Revenue + Miscellaneous Income = Total Revenue
2. Total Revenue - Operating Expenses = NOI
3. NOI / Current Market Cap Rate = Value
Though the resulting value range can provide an idea of facility worth, regional market conditions are the true gauge of what a property will sell for in the open marketplace. Factors to consider are cap rates, current and historical rental rates, occupancy rates, competing facilities, market stability and demographics. It’s critical to consider these trends.
For example, let’s say you’re trying to sell an infill property with an aggressive asking price and cap rate. Most investors would look at the property and express dissatisfaction, saying the asking price and bid are too diverse to resolve. However, a smart seller and his broker would likely bridge the gap by marketing to buyers who are able to absorb the aggressive price through economies of scale—that is, elimination of redundant property and management expenses.
The market-comparison approach looks at current market conditions and similar properties that are currently listed or were recently sold. Precision in selection and describing these “comps” is key to this valuation technique, which assumes a buyer is not willing to pay more for a property that was recently paid for an equivalent asset. The examination will include facility size, condition, location and other important factors. A qualified appraiser can make appropriate adjustments to compensate for differences between projects.
Cost or Replacement Analysis
Replacement analysis is often the easiest method to support property values. The math is based on what it would cost to duplicate a building, including the land and construction. Though replacement analysis is a simple determination, it’s an inexact science that excludes market dynamics such as location, demographics, possible moratoriums and stabilization costs.
For example, this approach would be ineffective in California, where, until recently, property values skyrocketed while construction costs remained constant. Not too long ago, one stable storage property would have sold for $50 to $70 per net rentable square foot, a historical milestone. Now that same facility appears to have reached a price crescendo of $100 to $150 per square foot. Another property in Hermosa Beach recently sold at a record $234 per square foot. Obviously, replacement costs are nowhere near perceived values in the open market.
When it comes to valuation, other mitigating factors come into play regardless of the type of analysis used. Consider the following.
Self-storage properties are a combination of retail and quasi-industrial construction. Design is a big component of value. For instance, a facility should include the following features:
- Ample curb appeal
- An attractive layout
- A strong sense of security
- An inviting office
- A style that blends with the community
- Suitable landscaping
Demographics play a dominant role in determining value. The population within a 3- to 5-mile radius of the facility must be evaluated. If census predictions are poor and new facilities enter the market, occupancy levels will surely suffer.
This brings another important factor into play: square feet per capita, or the amount of available storage space for each individual residing in the area. The rule of thumb is 5 to 6 square feet of storage per person is acceptable. This number is derived by dividing the target population by the amount of net rentable square feet of all facilities within the market. While infill properties are usually impervious to this number thanks to high population density and a wealth of nearby businesses, properties in secondary markets suffer for the opposite reason: low density and few surrounding businesses.
Finally, median household income should be factored into any analysis. If income in an area is low, it may be difficult to raise rents or maintain occupancy. Any of these factors can affect value.
Bottom Line: What’s It Worth?
The most convincing argument for value will always be cash flow. In today’s market, every $1,000 of net operating income equates to about $13,000 in facility worth. Therefore, running and operating an efficient cash-flow machine is the best formula for achieving greater market value.
As much as possible, keep your actual rental rates consistent with advertised rates and those of area competitors. Compare your expense ratios with operating formulas available in industry publications. Out-of-line expenses will only take money out of your pocket when you decide to sell.
Consult with an experienced regional broker who can provide you with a comparative analysis of other area properties on the market or recently sold. As with any commercial investment, the value of the property will be primarily based on cash flow, not the number of storage units, rentable square feet or acreage. These guidelines should give you an excellent chance to receive maximum value in the sale of your investment property. Good luck!
Stephen Grossman is a senior vice president with Lee & Associates-Newport Beach Inc. He has been responsible for the sale of more than 600,000 buildable square feet of entitled land and more than 2.5 million square feet of existing self-storage. For more information, call 949.724.4709; e-mail firstname.lastname@example.org.