Capitalization Rates • Section 15 In


the previous section, we discussed how to develop a year-one proforma for a self-storage property. The projected expenses are deducted from the income


to determine the net operating income of the property. A capitalization rate is a rate-of-return on a real estate in-


vestment based on the net operating income. Capitalization rates are fluid and take into consideration many different variables with regard to the real estate investment, as well as the state of the market at the time of the analysis. It is important to know that properties can change at any time, and the identification of that rate is at that particular point in time. As it relates to the subject property, variables can be the quality and condition of the property, location, tenancy, and historical operations. Externally, variables include the current market conditions, interest rates, and surrounding and potential competition. All of these factors play a role in the ultimate net operating income of the property; however, they are also considered when applying the rate to deter- mine the value of a property.


So, how does one determine the appropriate capital-


ization rate? First, an analysis of the trends must be done. Current capitalization rates are compressed but stable. Looking at the following chart, over the 20-year timeframe, capitalization rates have declined from 10 percent to the 2016 average of just less than seven percent. This data has been culled from a review of nearly 6,400 sales representing self-storage properties nationwide since January 2000.


While in the recent past, capitalization rates declined


due to the demand for product in the sector; however, in the past year capitalization rates have stabilized. Through the most recent recession, self-storage proved to be more recession-resistant than other property types such as of- fice, industrial, and hospitality. This is logical as self-storage


The evidence of the resiliency of self-storage is most


often observed when comparing the returns of the self- storage Real Estate Investment Trusts (REITs) to the returns of other-sector REITs. The strength of the sector is particular- ly noticeable in 2008, when the self-storage REITs were the only sector to have positive returns. All other property types have had at least one negative year since 2008, whereas self-storage has had none. This steady growth has led to an influx of capital to the market and, thus, has placed upward pressure on values, resulting in a compression of capitaliza- tion rates.


Capitalization rates are dependent upon a variety of fac- tors, including, but not limited to:


is in demand during good times and in bad times. During downturns, storage is primarily needed due to downsizing in both residential and commercial sectors. During an eco- nomic expansion, self-storage may be used for a variety of reasons: moving, additional space for business goods, file storage, etc. Additionally, people have disposable income to store these types of items, so demand for storage increases. Capitalization rates have stabilized in the past year or so, in part, due to the concerns of the impact of new supply.


While in the recent past,


capitalization rates declined due to the demand for product in the sector; however, in the past year capitalization rates have stabilized.


2018 Self-Storage Almanac 155


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