While the self-storage industry shares many characteristics of typical real estate investments, a few things make it unique to investors. The main difference is the lease term. A typical self-storage lease is month to month. As the economy recovers, a self-storage investor will be able to capture the improving rental rates quicker by renewing month-to-month tenants at a higher rate.
In addition, a cap rate for office, industrial and retail is handled differently than self-storage. Annual tenant improvement, maintenance reserves and leasing commissions are excluded from NOI. Even if an investor is purchasing these types of assets at an 8 percent cap rate, it does not take into account the tenant improvement and commissions at lease expirations.
Self-storage does not have tenant improvements or leasing commissions, and maintenance reserves are included in NOI. Therefore, an investor purchasing a self-storage property at an 8 percent cap rate is a true return compared to office, industrial and retail cap rates.
Due to short leases in self-storage, most investors typically run a five-year DCF. The shorter hold period for self-storage will have an effect on the cash flow and residual split. Self-storage typically utilizes 35-65 percent on a stabilized property versus 50-50 for a 10-year DCF, which is attributed to the shorter hold time.
In 2008, self-storage operations were resilient against the recession. Many operators’ NOI increased or held steady for most of the year. Today there are higher barriers to entry and fewer lending dollars, which could mean less competition for those already in existence. Put it altogether and self-storage is poised to reap the benefits of a recovering economy.
Steve Mellon is a managing director at Holliday Fenoglio Fowler LP. He has been involved in excess of $1.3 billion worth of self-storage transactions. HFF’s self-storage professionals offer comprehensive services, specialized experience, knowledgeable investment sales and capital markets expertise to storage owners and investors nationwide. For more information, visit www.hffselfstorage.com.