Section 15 • Self-Storage Valuation
be carefully considered when forecasting into the future. Now that a year-one forecast is concluded, a direct capitalization and yield capitalization are appropriate and shown in in Tables 15.5, 15.6, and 15.7 on page 138.
• Relationships – A 10-year discounted cash flow model is the primary decision maker in over 75 percent of investors sur- veyed (3Q Investor Survey, 2021 by NKF and published in the October 2020 Mini-Storage Messenger magazine). As outlined earlier, this is because of the increasing sophistication of the self-storage sector. It accounts for both cash flow (equity dividend) and appreciation (yield) during a typical 10-year holding period.
Item Description
Actual Rent (Occupied) Plus Market Rent (Vacant)
Billboard & Cell Tower Income Parking Income
Other Rental Income Ancillary Income
Economic Vacancy
Real Estate Taxes Property Insurance Utilities
Repairs & Maintenance Administration
Off-Site Management (% of EGI) On-Site Management Advertising
Miscellaneous Ground Lease
Indicated Market Value ‘As Is’
$12.89 $397,660 $0.06 $1,740
1.13 0.65 -
35,004 20,052 0
0.65 8% ($1.23)
$1.59 0.14 0.45 0.29 0.47 0.71 2.27 0.16 0.01 -
19,970
($37,954)
$48,939 4,200
14,000 9,000
14,500 21,824 70,000 5,000 250 0
Source: Compiled by NKF
136 Self-Storage Almanac 2021
• The relationship of the cap rate and Internal Rate of Return (IRR) or discount rate should be within 50 ba- sis points of the compound rate of the net operating income during the holding period. In this example, the net operating income is forecast to increase at 3.19 percent. With a cap rate of 5.5 percent, an IRR of 8.25 percent is within the 50 bps parameter.
• As a test of reasonableness, the relationship of cash flow to appreciation can be examined. In this example, the reversion or appreciation compo- nent represents 59 percent of total value, with the balance being attributed to cash flow. In an ideal market, the balance is 50 percent/50 percent. But in appreciating sectors and markets like this self- storage example, the reversion or appreciation com- ponent may be as much as 65 percent. Conversely, in down markets, the cash flow may be emphasized as much as 65 percent with only 35 percent of total value being attributable to appreciation.
The Sales Comparison Approach The sales comparison approach utilizes sales of compa- rable properties, adjusted for differences, to indicate a value for the subject. Valuation is typically accomplished using physical units of comparison such as price per square foot or economic units of comparison such as the effective gross income multiplier. Adjustments are ap- plied to the property units of comparison derived from the comparable sale. The unit of comparison chosen for the subject is then used to yield a total value.
• Unit of Analysis - The appropriate unit for compari- son in the sales comparison approach is the price per square foot of rentable area. For self-storage, the price per unit can be easily skewed due to variances in unit mix. For example, a price per unit analysis shows a higher range. Therefore, the price per square foot of rentable area is considered most credible.
• Economic Characteristics - One of the most under- utilized adjustments particular to self-storage is Eco- nomics Characteristics. Since cash flow is the driver of investment decisions in the asset class, economic characteristics should be among the most impor- tant adjustments. Economic characteristics include attributes associated with a trade area beyond the location adjustment. For self-storage, this adjust- ment considers whether the conditions of the comparable trade area can be classified as oversupplied, undersupplied, or at equilibrium. Net operating income per square foot can be one benchmark tool; however, it is not a mathemati- cal relationship and must be used with great care.
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