Cap Rates • Section 11 O
ne of the most frequent asked questions for appraisers is, “What are current cap rates for self-storage facilities?” or “What cap rate would you apply to my facility?”
Before that question can be answered in a meaningful man-
ner, there are at least 20 questions that need to be asked. These questions might include:
• Where is your property located? • What is your occupancy (physical and economic)? • What is market occupancy? • Are there any facilities under construction in your neighborhood?
• Are you offering concessions? • How old is your property? • What are the construction materials? • What is the NRSF? • What is your unit mix? • Is there excess/surplus land available for expansion?
The list can go on and on. These are all questions that must
be considered when deriving a cap rate for a property. What are cap rates? A capitalization rate or cap rate is the rate
or percentage of return from a real estate investment property based on the income that the property is expected to generate. The capitalization rate is used to estimate the investor’s poten- tial return on the investment.
In simple terms, the cap rate can be determined by dividing
the investment’s net operating income (NOI) by the current mar- ket value or the sales price of the property with the NOI being the annual return on the property minus all operating costs. The cap rate is determined by using the following formula:
Capitalization Rate =
Net Operating Income / Current Market Value Hence, if an investment property is purchased for
$1 million and the annual NOI is $100,000, the cap rate on the investment will be 10 percent. Looking at it another way, if an investment property provides $160,000 a year in NOI and comparable properties in the market have sold based on a cap rates of 8 percent, the value of the investment property is approximate- ly $2 million—$160,000 divided by 8 percent (0.08) equals $2 million.
In terms of comparison, a property with a higher
cap rate typically indicates less risk associated with the investment. Conversely, a lower cap rate typically indicates more risk for the investment. While this may seem very easy to understand and uncomplicated,
cap rates are indeed a complex issue due to the various factors involved and they require a thorough understanding.
Cap Rate Trends There is no doubt that cap rates have continued trending down- ward in 2015 since interest rates have remained at an all-time low and the strong demand in the self-storage industry outweighs the supply available. According to the 4th Quarter 2014 National Investor Survey prepared by PriceWaterhouse Coopers (PwC), cap rates for self-storage facilities have continued to decline, with an average of 5.90 percent. This represents a decrease of 22 basis points from the 2Q 2014. (Of special note: PwC no longer tracks this information for capitalization rates.) According to the Colliers International Survey (CIVAS), which also tracks national sales, capitalization rates have continued this downward trend in 2015.
So, why has the self-storage industry done so well in the last five years? Following are a few reasons this asset class stands out:
• Self-Storage is driven by population (roof tops). The typical tenant mix for facilities is approximately 70 per- cent residential users. As of June 2015, there were over 500,000 multi-family units under construction, the most since 1986. As single-family subdivisions and multi-family communities continue to build out or become more diverse, there will be a continued need for self-storage space.
• There is plenty of room for industry consolidation. The 10 largest operators control only 14.96 percent of the facilities nationwide and 20.52 percent of the NRSF.
Chart 11.1 – National Capitalization Rate Averages
0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%
2Q 2009 4Q 2009 2Q 2010 CIVAS PwC 4Q 2010
2Q 2011
4Q 2011
2Q 2012 4Q 2012 2Q 2013 4Q 2013 2Q 2014 4Q 2014 2Q 2015 Source: Colliers International and PwC Real Estate Investor Survey 2016 Self-Storage Almanac 119
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