Self-Storage Valuation • Section 15
it points out the risks of giving opinions of value as a way to make a living. In self-storage, appraisal has evolved as the asset class has become significantly more sophisticated in recent years. Therefore, the focus of this section is on key points to analyze when appraising or arriving at an opinion of value.
A The income capitalization
approach reflects the subject’s income-producing capabilities. This approach is based on the
assumption that value is created by the expectation of benefits to be derived in the future.
3-Miles Radius 200,439 Source: Compiled by NKF
ppraisers like to work with numbers, but they don’t have the personalities to be accountants. An adage in the form of a joke told for decades in the profession,
cash flow. As a result, the income capitalization approach is emphasized in self-storage valuation and will be analyzed first.
The Income Capitalization Approach The income capitalization approach reflects the subject’s income-producing capabilities. This approach is based on the assumption that value is created by the expectation of benefits to be derived in the future. Specifically estimated is the amount an investor would be willing to pay to receive an income stream plus reversion value from a property over a period of time. The two common valuation techniques as- sociated with the income capitalization approach are direct capitalization and the discounted cash flow (DCF) analysis.
The basis of an income forecast for valuation is in the mar-
ket conditions of the subject trade area, the historical trends of the subject property, and comparable data. As to market conditions, a determination should be made if a trade area (often defined as a three-mile radius, but this can be tested by ZIP code studies of existing customers) is under-supplied, over-supplied, or at equilibrium. This can be done qualita- tively by analyzing the occupancy of all the competition.
49.4% 3.31
$79,320 1,080,754 5.39
Appraisal History A self-storage appraisal is simply the economic model or methodol- ogy of developing an opinion of value. The economic concepts of value have been evolving for thousands of years, but the economic model of real estate appraisal was first codified in the 1930s by The American Institute of Real Estate Appraisers (now the Appraisal Institute) and the publication of the first edition of “The Appraisal of Real Estate” in 1951. The components of the valuation process can be outlined as:
• Identification of the Problem (for appraisal, usually identifying the assignment)
• Scope of Work Determination • Data Collection and Property Description • Data Analysis • Application of the Approaches to Value
There are three specific approaches to value that reflect distinct
methods of data analysis: the Cost Approach, the Sales Comparison Approach, and the Income Capitalization Approach. The use of two or three of these approaches are then reconciled into a final opinion of value. For self-storage, the primary investment criterion is based on
7.75
2.36
472,648
Existing Supply New Construction
Total Supply
Less: Occupied Square Feet Available Supply
Less: Market Vacancy (5 percent) Subtotal (Remaining Supply)
Unsatisfied Demand
Demand Less Remaining Supply Equilibrium Forecast
Source: Compiled by NKF 2021 Self-Storage Almanac 133
__________ 1,084,754
0
__________ -1,005,608 75,146
__________ -54,038 -21,108 472,648
__________ 451,540
Under-Supplied
1,080,754
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