Self-storage property value is derived from a complex combination of performance and market factors. Historical, current and pro forma data can all play a role. Thanks to the coronavirus pandemic, today’s market is extremely dynamic and rapidly changing, so it’s more important than ever to understand the worth of your assets.
Keep in mind that when owners talk about value, most are referring to “market value” as used by potential investors, lenders and government agencies. This is an opinion or estimate of worth at a specific point in time, taking current conditions into account. Ultimately, the only way to know a property’s true market value is to solicit bids from a broad pool of qualified buyers. At the end of that process, you can be confident of having obtained a true value—at least until the market inevitably shifts again.
Still, there are common indicators to the market value of your self-storage property. Here are 10 to examine.
1. Physical and Economic Occupancy
Physical occupancy is the percentage of units that are occupied divided by the property’s total existing units. Economic occupancy is the percentage of units rented at full asking price. To determine this number, divide total actual rent collections by gross potential rent. Because both data points are just a snapshot in time, it’s critical to know the most recent statistics and be able to show growth or consistency in your numbers, depending on whether you’re in lease-up.
2. Net Operating Income (NOI)
NOI is simply income minus expenses. Calculating it is an important exercise and is the foundation for additional factors discussed below. For NOI to be accurate, exclude depreciation, debt service, capital improvements and any non-operating expenses.
3. Capitalization (Cap) Rate
Simply put, the cap rate is the percent return an investor would earn if he paid all cash for a property (NOI divided by market value). However, when evaluating a property, it’s important to consider three different cap rates:
- Current cap rate: This considers the most recent facility performance, usually three, six or 12 months of income and expenses.
- Pro forma cap rate: This looks at the future, or projected, potential of the property.
- Market cap rate: This is the most complicated, as it’s constantly changing due to recent sales, economic outlook, supply and demand.
With so many metrics and factors to consider when determining a cap rate, it simply can’t be standard. For example, your property can’t command a 6 percent cap rate if the market is only accepting a 7 percent cap for comparable properties.
4. Pro Forma Performance
This is what can be realistically expected by an investor in the first year of facility ownership. Can the rental rates be increased? Can expenses be trimmed? Are there opportunities for additional income, such as the sale of tenant insurance, retail product or truck rentals? If the answer to these questions is positive, the goal is to persuade a buyer to pay you today for as much of this future value as possible.
By that same token, however, you must also consider in your analysis possible increases to facility expenses. For example, will items like property insurance and taxes go up?
Statistics like population counts and the median household income of local consumers are important components in valuing a property. To begin your research, examine a one-, three- and five-mile radius around your facility. Compare the population and median household income in those areas to those for the state as a whole.
Keep in mind that median household income varies widely from state to state. In 2019, it was $63,000 nationwide, ranging from $43,000 in Mississippi to $86,600 in Massachusetts. You must also consider other geographic factors. For example, are you near a military base, university or major housing development? These lead to increased self-storage use and should positively impact performance.
6. Traffic Count and Visibility
The number of people in the area around your facility matters less than how many will see it every day. How many cars travel past your site regularly? Do you have a prominent, well-placed sign? If you have a high traffic count but no sign, this could be considered upside potential if there are no local restrictions regarding signage.
7. Market Level
Investors are often willing to pay a premium for property in a primary vs. a secondary or tertiary market. Primary markets have high barriers to entry for new development but are attractive to investors due to higher traffic volume and a wealthier clientele. Buyers are willing to pay the lowest cap rates on properties in these markets because they can expect consistent top-line growth.
In the last several years, large private operators and REITs have shied away from acquiring facilities outside of dense urban centers. However, as top markets become saturated with supply, owners and developers are looking to new markets as opportunities for growth. For example, in February, the tertiary markets of Jacksonville, Fla., and New Orleans saw their new-supply pipelines increase to 12.3 percent and 6.5 percent of total stock, respectively.
8. Cash-On-Cash Return
This is the percentage of return an investor generates based on his down payment on the property. If he puts down $1 million and the property generates $100,000 per year of free cash flow, then the cash-on-cash return would be 10 percent. Expectations vary by market and performance; however, most down payments will be 25 percent to 40 percent of the property value.
9. Sales-Comparable Analysis
Properties that have recently sold in your area affect the value of your self-storage facility, but so do those that are under contract and not in public record. This means you need to do a detailed analysis of the market to find out what people are paying for local facilities.
To figure out how your facility compares to others, review its size, location, visibility, age, Web presence and unit mix. If you have access, it’s also helpful to know current NOI. Knowing the sales comps will help you understand what the market commands for price per square foot and cap rates in your area.
10. Rent-Comparable Analysis
Review all the competition within a five-mile radius of your facility, then compare your rental rates and unit mix to theirs. Is there a reason for your rates to be different, such as facility age or some amenity or service? Rent comparisons are particularly important if you don’t use a revenue-management software. Many self-storage operators are now adopting these systems to maximize profit and occupancy according to real-time market data.
The Big Picture
To create a comprehensive property evaluation, it’s important to understand the macro and micro economic picture. With COVID-19, that picture is as unclear as it’s ever been. Luckily, the resilient self-storage industry hasn’t seen as much erosion to market value as other property sectors. After the stock market peaked on Feb. 20, lodging and student-housing REITs lost more than a quarter of their value inside a month. By comparison, self-storage REITs only fell approximately 16 percent.
For cash-rich investors with strong stomachs, there will be plenty of opportunities as property values find a floor. In the wake of the Great Recession, Blackstone and other sophisticated investors bought oodles of single-family homes at greatly discounted prices, making profit hand over fist in rent or capital gains in the years that followed. It isn’t out of the realm of possibility that top self-storage operators will look to do the same now.
Ryan Clark is director of investment sales and Richard Riddle is vice president for SkyView Advisors, where they help self-storage buyers and sellers through a range of advisory services, including acquisition, disposition and recapitalization, asset valuation, and joint-venture structures. They pride themselves on taking a client-centric approach, with a focus on building long-term relationships and developing a strategy to best serve each customer’s unique needs. For more information, call 813.579.6363; visit www.skyviewadvisors.com.