Section 14 • The Overall Capitalization Rate
rates represent market expectations at the time of sale. The per- ception of investors of the self-storage market two years ago may vary to current conditions. Therefore, additional analyses are warranted.
• Investor Surveys – Survey research is based on periodic publications of the current thinking of investors compared to historical performance data of comparable sales. Sur- veys are generally used as support and should not be re- lied upon as a primary source. They are especially useful to understand real-time market dynamics. Surveys can vary in scope of research, so it is worthwhile to review a wide variety of publications. The results of the most recent self- storage investor surveys are summarized in Table 14.2 on page 129.
5.50% Source: NKF Self-Storage Investor Survey: 3rd Qtr. 2020
Loan to Value Ratio Interest Rate
Amortization (Years) Mortgage Constant Equity Ratio
Equity Dividend Rate 65%
4.25% 30
5.90% 35%
5.00%
Mortgage Requirement Equity Requirement
Indicated Capitalization Rate (Rounded) Source: Compliled by NKF
Loan-to-Value Ratio Interest Rate
Amortization Term Mortgage Constant Equity Yield Rate (YE Projection Period (n)
65% 4.25%
30 Years 5.90%
) 13.50% 10 Years
Compound Annual Appreciation / Depreciation 3.3% per Year Total Appreciation/Depreciation Source: Compliled by NKF
130 Self-Storage Almanac 2021 37.69%
65% x 5.90% = 3.84% 35% x 5.00% = 1.75%
6.50% It is interesting to compare the sales data in Table 1 to
the survey research in Table 2. For example, an average cap rate of 5.69 percent was indicated by the comparable sales table and the investor survey (most recent data) indicates a 5.5 percent cap rate overall. Segmented by investment quality, a Class-B average cap rate from the survey is 5.75 percent (NKF Self-storage Investor Survey: Q3 2020). This may reflect national data compared to geographic specific data. The investor survey data also suggests a slight downward trend over the past 3.5 years, suggesting self-storage real estate values have increased. Survey research may bifurcate among quality of the asset class as indicated in Table 14.3.
Cap Rate Range 4.50% – 5.50% 5.50% – 6.25% 6.25% – 8.50% Cap Rate Average 5.00%
The perception of investors of the self-storage market two years ago may vary to current
conditions. Therefore, additional analyses are warranted.
This is useful because cap rates vary by the
physical and economic characteristics of a property. In general, the higher quality or class of property, the lower the cap rate (resulting in higher values). Survey research can also be supplemented by direct interviews with mar- ket participants such as real estate brokers who specialize in the self-storage asset class. In this regard, local participants can provide anecdot- al but vital understanding of the local market conditions. For example, in markets with new construction, the cap rates may be impacted.
• Band of Investment – This technique is based on returns to debt and equity, sometimes called a built-up model. It accounts for market-based financing with a market-based return to equity.
The return to equity for a single asset is typically higher than a comparable self-storage annual return to investor or divi- dend from a self-storage REIT or stock (does not account for appreciation of the asset). Another way to look at the equity dividend, or cash on cash, is the annual return on every dollar of equity. Since most properties are purchased with a com- bination of debt and equity, the technique has relevance in the market. A Band of Investment Analysis example is sum- marized in Table 14.4.
In this example, the model solves for a cap rate that is simi-
lar to the average of the latest investor survey and in the range of the comparable cap rate data. Mathematical models like the
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