The objective of self-storage facility valuation is to determine worth based on unbiased metrics that can be calculated to assign a reasonable number. Though this may sound straightforward, there are varying approaches being used in the market, and owners and investors don’t always agree. They may come to a different conclusion on the same property.
When it comes to determining value, understanding market dynamics and capitalizing on value-add opportunities should be the goal of both parties. Let’s examine the factors impacting asset value today and some levers you can pull to improve it.
Though familiar to most parties, the sales-comparison approach to value will likely be inaccurate for self-storage. The reason is there’s often a lack of comparable sales (comps) within an adequate timeframe and/or radius of the subject property. If they do exist, the purchase price may be undisclosed. In those cases, the average price per square foot could appear considerably lower than the true amount.
That said, comps are helpful in reporting the change of ownership and presence of private or public (real estate investment trust) owners. When reported accurately, they can also be useful for price per square foot. Though they don’t provide the entire picture, they should be part of the valuation process.
Everyone loves to talk about capitalization (cap) rates. Why? Primarily because they’re a simple way to express value. Cap rates are a market-specific, mathematic way to generate a number that links net operating income to asset worth. Since they’re dependent on facility financials, however, self-storage owners should be wary of anyone who quotes a specific cap rate for their property and hasn’t reviewed the profit-and-loss statements.
When evaluating financial reports, evaluators assume reoccurring revenue will be accounted for and that expenses accurately reflect current market rates. Occasionally, though, discrepancies can be uncovered. For example, what happens when an owner performs all of their own maintenance or a manager is being paid double the local market rate? Both scenarios change the expense report and, therefore, the cap rate.
As a self-storage owner, you should know your income-to-expense ratio to remain competitive in your market. Reviewing operating costs and making necessary adjustments will help maintain property value. Investors will analyze expense ratios and apply their own metrics when assessing value. They’ll take into account the numbers you provide and then adjust accordingly for any values that don’t match up with the market.
Rental Rates and Occupancy
Rental rates deserve considerable attention when determining a true self-storage valuation. Because of their intimate relationship with income and, therefore, cap rates, they’re a vital part of calculating facility worth. If an owner wants to maximize property value, they must raise their rates in accordance with the market. In fact, when they don’t, value is negatively impacted. Whether your plan is to sell or hold, catch up to local street rates if you aren’t already in alignment.
Understand that 100% physical occupancy is never the goal. In fact, this is often seen as a negative by investors when assigning value. It’s also essential to know the difference between physical and economic occupancy. Value is seen in economic occupancy because it measures total possible income vs. the number of filled units. If you hope to achieve maximum value, aim to hover around 90% economic occupancy. If you’re at 100% physical occupancy, raise your rates.
In addition, capitalizing on square footage and the ideal unit mix for your market is essential for return on investment. For example, if no one in your market has any 5-by-5s available, can you provide this size? Minor investments in unit mix can increase facility value.
Macro and Micro Economic Factors
Macroeconomic factors include things like population growth, interest rates and inflation. We have no control over these, however, they strongly influence the commercial real estate market. Watching them can help provide scale in determining self-storage value.
In the current economy, rising interest rates are directly impacting the amount buyers can pay for properties. Investors who require financing are unable to make the same offer they could a year ago or even a few months ago. If you’re an owner, it may feel like you’ve somehow lost facility value, but what has actually changed is the buyer’s purchasing power. Investors must account for the increased cost of acquisition, and the difference will be reflected in their offer.
Microeconomic factors in self-storage include things like traffic counts, ease of access, surrounding retail and housing, etc. They can greatly alter the valuation of two seemingly similar properties. Some of these levers are ones you can pull to improve value. For example, if your facility doesn’t have good street visibility, invest in a strong digital presence. In fact, owners who don’t already have a line item on their expense report for digital marketing should be aware that investors will add it to their calculations when assigning value.
You also need to be knowledgeable about any new development projects that have been approved by local planning boards. Any time retail or housing is approved or under construction near your facility, it’ll help your valuation, while incoming self-storage projects could have an adverse effect. If there’s strict zoning in your market and other high barriers to entry, that’s a good thing. Always pay attention to local zoning laws and tax changes, as they can alter your property value.
Invest the Time
When attempting to determine self-storage facility value, the best approach for owners and investors is to do the research. As an owner, you should review your financials and compare them with those of competitors. Use a critical eye to assign objective, emotion-free numbers and then make appropriate adjustments. If you don’t have access to competitor information, reach out to local real estate professionals who may be willing to share free data.
Investors should consider using multiple information sources when assigning value. Relying on only one industry platform limits the ability to make an informed assessment.
Real estate values consistently change. Therefore, self-storage owners and investors should regularly familiarize themselves with current circumstances at the facility level, within the surrounding market and across the nation.
Melissa Shandor serves as the strategic advisor in California and the Pacific Northwest for The Storage Acquisition Group, which specializes in acquiring off-market self-storage facilities and portfolios nationwide. The company also offers market-analysis reports, underwriting and closing support. Melissa uses her background and expertise in data analytics to acquire self-storage assets and maximize return on investment for sellers. To reach her call 704.202.4350; email [email protected].