While there may be many reasons for the difference in cash-on-cash return and facility value, most will likely relate to the number of buyers and sellers in the market rather than some intrinsic valuation issue. When you consider that a self-storage market is measured by an approximately five-mile radius around each property, the difference between a major- and secondary-market property is less about the city or town in which a facility is located and more out its specific position within that municipality. In other words, a well-located property in Ft. Collins, Colo., or Oklahoma City, Okla., is probably equal to a comparable, well-located property in Los Angeles or Montclair, N.J., as it relates to the property’s ability to generate a stable and growing income stream.
A Blessing and a Curse
One of the main reasons self-storage is such a great real estate investment—the lack of glamour and ego—is both a blessing and a curse. You don’t buy a self-storage facility to show it off to your golfing buddies. It's a blessing because all the value comes from the cash flow and not ego satisfaction. The curse, however, comes when you sell your property.
Buyers are seldom so smitten with a self-storage property that they “fall in love” with it and forget about the numbers. In almost every case, the buyer knows the market cap rate and operating costs and refuses to overpay for a property.
Clearly, there’s value in understanding what affects the market cap rates in self-storage. The reward is obvious and makes the game worth playing, but the trick is to make sure the difference is really in the price and not the market or quality of the project!
It’s easy to see why the former “ugly duckling” of real estate now enjoys the respect of all types of investors. The potential for growth in secondary markets combined with the impressive cash flow has elevated this opportunity to a whole new level—one that will rival the most glamorous of property types for years to come.
Ben Vestal is president of the Argus Self-Storage Sales Network, a national network of real estate brokers who specialize in self-storage. Argus provides brokerage, consulting and marketing services to self-storage buyers and sellers and operates SelfStorage.com, a marketing medium and information resource for facility owners. For more information, call 800.55.STORE; e-mail firstname.lastname@example.org; visit www.argus-selfstorage.com .