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Why Are Cap Rates Used

Why Are Self Storage Cap Rates Used To Value Properties?

In our previous blog on Cap Rates, we provided the definition of a Cap Rate and explained how Cap Rates are used to determine the value of a self storage facility. We would like to continue this topic by helping readers understand why we use self storage Cap Rates to identify property values.

Increased IncomeFirst, self storage properties are valued primarily on their ability to produce income. Cap Rates take this income and give it a value. This value, expressed as a Cap Rate, is based primarily upon the property’s ability to produce a stream of income in the future, and the perceived risk of maintaining that income stream.

Second, because self storage Cap Rates consider income only, they can be used to compare other alternate investments such as stocks, bonds and businesses, as well as other non-self storage real estate.

Third, no two self storage properties are exactly alike. Brokers and appraisers need a method to compare properties with different locations, physical conditions, quality of construction and level of management. Self storage Cap Rates are adjusted up or down depending on the level of risk of the property has in maintaining that future income stream.

Here are two extreme examples:
• The first is a rural property that is 15 years old with no on-site manager. The risk factors include a low population in the market area, the abundance of land that a competitor may build on, and finally the condition of the property after 15 years of use. This property may be valued at a 9.0% Cap Rate.
• The second is a three year old property located in a growing suburb built with a large office and showroom and staffed with a full-time manager. The value may be 6.5% because of the growing population, new construction, professional management and barriers of entry for competitors.
Factors which demand a higher Cap Rate (thus a lower value) are poor visibility, no management office, deferred maintenance, low occupancy, no security measures, declining population base, too much competition and poor design of the facility. Factors that lower the Cap Rate (thus increasing the value) are excellent visibility and access from a major highway, newer construction, well-designed layout, security measures including cameras, gates and door alarms, professional management, clean grounds, high occupancy and low delinquencies.

Let me first say that the Cap Rate used for a particular property is best determined by a professional real estate broker or appraiser that has lots of experience in self storage. They should be able to show you a minimum of 5 to 6 comparable properties with Cap Rates for you to compare.

That being said, my experience for self storage Cap Rates in the mid-Atlantic states range from a low of 5% for the best properties to 9.0% for properties that are considered higher risk investments. Some portfolio sales in this region have sold for less than 5% Cap Rates.

Identifying the correct Cap Rate that should be used to value a property takes expertise, industry knowledge and an understanding of the geographical market the facility serves. Ideally, working with a professional self storage real estate broker or appraiser is the best way in which to determine the value for your facility.

If you are ready to sell your self storage facility or are interested in purchasing one, contact us today and we will be glad to help you reach your goals. You can also request a Free Property Valuation of your self storage property at any time.

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