Section 15 • Capitalization Rates
• Location • Physical characteristics (condition, quality, total size, average unit size, age)
• Occupancy (physical and economic) • Available expansion land • Development activity in the market • Amenities
Generally speaking, a newer facility with a good location
and state-of-the-art amenities would provide an income stream with low risk. This type of product is very appealing to today’s investors; therefore, investor demand will put down- ward pressure on the capitalization rate for prime properties. On the other hand, a 1970s vintage facility in a rural area with a declining population would provide an income stream with higher risk. Therefore, a higher capitalization rate is warrant- ed, which translates into a lower value.
Mathematically speaking, a $500,000 net operating in-
come capitalization at five percent ($500,000/five percent) is $10,000,000, as compared to an eight percent capitalization rate at $6,250,000—quite a difference!
Taking these issues into consideration, self-storage fa- cilities can be sorted into three investment classes, and the appropriate capitalization rate is dependent upon the sub- ject’s investment class. It is not a requirement for a facility to possess all the attributes in a classification. However, if a property has attributes of both a class-A and class-B prop- erty, the capitalization rate should be at the higher end of the class-A range and/or the lower end of the class-B range to re- flect this. The table on the following page is a list of attributes for each of the self-storage investment classes.
Next, it is important to gather and analyze capitaliza-
tion rates from actual improved sales. This information can be obtained from real estate brokers or market participants.
One important factor to note is that capitalization rates can be calculated in a myriad of ways. For instance, a proforma may not include market-based expenses such as off-site management or real estate taxes. Therefore, it is important to understand the components of the capitalization rate and make adjustments to the income and expense projection, if necessary.
An additional method to
determining the capitalization rate for a specific market is to discuss the investment classes in a particular market with a
real estate broker who specializes in the self-storage asset class.
Other great resources are investor surveys or discussions
with a real estate broker who specialize in self-storage prop- erties. Many real estate firms publish investor surveys on a regular basis (generally quarterly or semi-annually) that reflect current market sentiment about a variety of factors that
impact self-storage valuation. The most commonly
discussed metric is the capitalization rate. Other reported figures include projected income, expense growth rates, and discount rates. The value from these reports lies not only in determining current market inclinations but also in viewing historical trends.
An additional method to determining the capitalization
rate for a specific market is to discuss the investment classes in a particular market with a real estate broker who specializes
2009 2010 2011 2012 2013 2014 2015
-41.07 35.55 18.41 -0.76 14.15 5.57
25.86 0.29
(Returns in Percent) 156 Self-Storage Almanac 2018
-44.02 28.04 14.50 -4.21 10.26 2.06
22.06 -2.59
-67.47 12.17 18.89 -5.16 31.28 7.40
21.00 2.64
-69.38 -48.36 4.84
13.60 -8.74 26.89 4.05
17.03 -1.27
27.17 33.41 12.20 26.74 1.86
27.62 4.56
-51.28 -24.89 21.57 28.43 8.27
22.58 -1.67 22.84 0.89
30.82 46.01 15.37 6.94
-5.36 40.04 17.07
-29.08 -11.98 22.81 40.87 11.82 3.60
-8.69 35.25 13.55
24.62 19.20 13.63 20.35 -7.06 33.32 -7.25
-17.06 -59.67 15.76 12.71 7.62
14.50 -11.41 26.62 -12.07
67.19 42.77 -14.31 12.53 27.18 32.50 -24.42
2008
-62.72 5.05 64.53 40.51 -16.38 9.33
8.37
23.07 28.12 -27.52
29.29 35.22 19.94 9.49
31.44 40.65
1.44 4.44
25.20 31.04 16.21 5.92
27.21 36.23
Source: Cushman & Wakefield
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