Using Direct Capitalization to Estimate Self-Storage Facility Value

By Ray Wilson Comments
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Cap rates have been declining, and cap and yield rates continue to decline, according to the most recent self-storage investor surveys by PricewaterhouseCoopers (formerly Korpacz). With new capital (equity and debt), cap rates have decreased 45 basis points to an average of 7.3 percent (stabilized) from one year ago.

Self-Storage Cap Rates***

The accompanying direct-capitalization model assumes the self-storage facility is operating at its long-term level of economic occupancy. If the facility is not stabilized, the appraiser must estimate the value of the rent loss between today's level of performance and stabilization, and then deduct that amount from the stabilized value estimate.

Self-Storage Direct Capitalization***

Though good-quality, stabilized facilities are in the most demand, limited available product has caused some investors to consider the purchase of unstabilized, “lower quality" or “value-added” assets. This is bringing more focus on facility classification as it relates to investment risk.

Self-storage investment conditions have improved significantly over the past four years as a result of the industry's outstanding performance. Public and private real estate investment trusts as well as large national and regional companies are competitively bidding on the limited supply of available investment-grade sites. Investor demand for good-quality, stabilized facilities is pushing cap rates down and values up to near pre-recessionary levels in many markets.

Charles Ray Wilson is the founder of Self Storage Data Services Inc., an independent research firm that maintains the nation’s largest database of self-storage operating statistics. He’s an internationally recognized leader in providing independent research on the self-storage industry. For more information, visit www.ssdata.net.

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