Section 10 • Self-Storage Valuation
quarter since 2009. The national average capitalization rate as of the 2nd quarter 2015 report was 6.10 percent, which is down 45 basis points from the 2nd quarter 2014 and down another 45 basis points from the previous year. The decrease in the recent quarter is being driven by strong competition among buyers and the expectation for value appreciation.
Properties that are generally located in primary markets, or
in non-distressed markets, are typically selling for capitalization rates lower than the national average stated above. PwC no lon- ger tracks this information for capitalization rates. According to our Colliers survey, which also tracks national sales, capitaliza- tion rates have continued this downward trend in 2015.
Market Participants Within this industry there are a handful of brokers that “truly” specialize and have significant experience and understanding within this property type. They are spread throughout the coun- try and provide a great perspective of what is taking place in
Table 10.6 – Band of Investments Assumptions Loan Amortization Period
Interest Rate
Loan-to-Value Ratio Mortgage Constant
the storage market. When determining cap rates, it is necessary to find out what is available on the market. Brokers will usually share with appraisers if they have received any offers (not nec- essarily 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 insight into a buyers motivations and cap rate expectations due to the feedback they have throughout the market. A broker who truly understands the nuances of the self-storage asset class is invaluable to buy- ers, sellers and appraisers alike.
Band Of Investment Technique Because most properties are purchased with debt and equity capital, the overall capitalization rate must satisfy the market re- turn requirements of both investment positions. Lenders must anticipate receiving a 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
30 Years 4.75% 70%
0.06260
Table 10.7 – Band of Investments Calculation Mortgage Component
Equity Component
Indicated Capitalization Rate Capitalization Rate (rounded)
repaid through period amortization payments. Similarly, equity investors must anticipate receiving a competitive equity cash return commensurate with the perceived risk or they will invest their funds elsewhere. Tables 10.6 and 10.7 provide an example of the how this technique is calculated.
Another trend with financing that the industry is seeing is
70% x 0.06260 = 0.044 30% x 0.07000 = 0.021
0.065 6.48%
Chart 10.3 – Investors Surveys
5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00% 8.50% 9.00% 9.50% 10.00%
8.75% 8.55% 8.45% 7.75% 7.50% 7.30% 7.00% 6.75% 6.55% In summary, deriving cap
1H 09 2H 09 1H 10 2H 10 1H 11 2H 11 1H 12 2H 12 1H 13 Source: Colliers International and PwC Real Estate Investor Survey
116 Self-Storage Almanac 2016
rates is more art than science. Appraisers strive to research all facets of the commercial real estate industry. We interview buyers, sellers, brokers, and lenders as well as study trends in financing to pick the right cap rate for the property being analyzed. In regard to the ques- tion, “What are current capi- talization rates for self-storage facilities?” the correct answer is, “It depends.”
that there is a lot of capital chasing very few deals. As such, in- vestors are willing to take less return on equity. This puts down- ward 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 example rates stated in table 10.7. These premiums are often being paid for properties on a ‘Pro Forma’ basis for newer facilities that have yet to sta- bilize. 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.
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