Further, the expense numbers need to reflect the market-labor cost of running a self-storage property, which should include an onsite manager’s salary if the owner is currently doing the work for free. It’s also assumed the operating expenses include an off-site management fee over and above the onsite management expense. This will range between 4 percent and 6 percent of gross revenue depending on the size of the property.
Many owners will say some of the assumptions don’t apply to them for various reasons, but I can assure you there are almost no exceptions in the marketplace of real sales. In the end, ignoring these assumptions is, at best, self-deception and, at worst, can have serious impacts on the financing or sale of a property.
Why Do Some Properties Have Higher or Lower Cap Rates?
Since all properties are not alike, they can command different cap rates. The variations from normal cap rates (today between 6.5 percent and 8 percent) usually reflect the quality of the project and the risk to the investor. For example, a 40 percent vacant, metal-building project in a rural area would require a higher cap rate to reflect the increased risk and lesser-quality asset. On the other hand, a large masonry project with full security in a growing metropolitan area with consistently increasing rents would command a premium cap rate, perhaps in the range of 6 percent to 7 percent.
Once again, while the cap rate may vary, the underlying assumptions about the NOI do not. Property valuations are somewhat subjective, but our collective experience would indicate that knowledgeable buyers and sellers agree on the quality of the NOI and with the risk variances that lie in the very narrow range of cap rates.
Do Cap Rates Really Reflect the Market?
The answer is unequivocally “yes”! If cap rates did not reflect the marketplace accurately, we would not be using them in so many ways. The chart below will give you an idea of how cap rates have varied over the last 10 years. Please keep in mind it takes into consideration all self-storage properties around the country. Remember, a property in a small city or town will not command the same low cap rate as one in San Francisco or Midtown Manhattan.