Section 9 • Valuation
Table 9.4 – Colliers Property Rating System A
B Characteristics Excellent ***** **** Good C Average *** Fair
Cap Rate Range 5.50%-6.5% 6.5%-7.5% 7.0%-8.5% 8.5% and Up ** Ranges subjective and based on Colliers internal database and market data
points from the Q4 2013 survey at 6.25 percent and down 43 basis points from the previous year. Although the market’s average over- all capitalization rate has declined during the first half of 2014, inves- tors believed capitalization rates would stabilize in the second half of 2014 with future changes being directly linked to changes in interest rates. Colliers reported the national average capitalization rate at 6.55
percent as of Q2 2014, a decline of approximately 20 points from the last half of 2013. While certain investors express concerns that overall capitalization rates for self-storage would begin to increase in 2015, the ability to quickly adjust rental rates diminishes inflation- ary concerns and keeps optimism high.
Market Participants Within this industry are a handful of brokers who “truly” special- ize and have significant experience and understanding within this property type. They are spread throughout the country and provide a great perspective of what is taking place in the storage market. When determining cap rates, it’s necessary to find out what is avail- able on the market. Brokers will usually share with appraisers whether they have
received any offers (not necessarily how much), if the seller is firm, how long the property has been on the market, and strengths and weaknesses of the property. Brokers can provide additional in- sight into a buyers motivations and cap rate expectations due to the feedback they receive throughout the market. A broker who truly understands the nuances of the self-storage asset class is invaluable to buyers, sellers, and appraisers alike.
Band Of Investment Technique Because most properties are purchased with debt and equity capi- tal, the overall capi- talization rate must satisfy the market return require- ments of both in- vestment positions. Lenders must an- ticipate receiving a
Band of Investments Assumptions Loan Amortization Period
Interest Rate
Loan-to-Value Ratio Mortgage Constant
30 Years 4.75% 70%
0.06260 Band of Investments Calculation
Mortgage Component Equity Component
Indicated Capitalization Rate Capitalization Rate (rounded)
98 Self-Storage Almanac 2015
70% x 0.06260 = 0.044 30% x 0.07000 = 0.021
0.065 6.48%
D **
competitive interest rate commensurate with the perceived risk of the investment or they will not make funds available. Lenders also require that the principal amount of the loan be repaid through period amortization payments. Similarly, eq- uity investors must anticipate receiving a competitive equity cash return commensurate with the perceived risk or they will invest their funds elsewhere. The Band of Investment As- sumptions and Calculation tables below left provide an ex- ample of how this technique is calculated.
Within this industry are a handful of brokers who “truly” specialize and have significant experience and understanding within this property type.
Another trend with financing we are seeing is that there
is a lot of capital chasing very few deals. As such, investors are willing to take less return on equity. This puts downward pressure on cap rates, and raises values. Investors with the opportunity to sell or purchase a portfolio are seeing cap rates 50 to 100 basis points lower than the rates used in the example. These premiums are often being paid for properties on a
“Pro Forma” basis, for newer facilities that have yet to stabi- lize. The opportunity to take down a critical mass of space or facilities is highly desirable for a potential buyer. With these trends in financing, there may not be a better time than now to sell or refinance. Deriving cap rates can be more art than science. Apprais-
ers strive to research all facets of the commercial real estate industry. They interview buyers, sellers, brokers, and lenders as well as study trends in financing to choose the right cap rate for the property being analyzed.
Understanding Cap Rates
A cap rate is an investor’s required rate of return given the perceived risk of the investment.
Cap Rate NOI = Value For example, if a self-storage property has a net op-
erating income of $150,000 and is in a market where the estimated cap rate for a self-storage property of this quality, location, etc., is 7.50 percent, the property would be valued at $2 million. One also must determine the correct timing of the NOI for valuation purposes. It is often necessary for buyers to make adjustments to the seller’s expenses and revenue to be that which the buyer believes will be in place the day they take over a site or projected to be in place for the first 12 months.
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