This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Further, the expense numbers need to reflect the market-labor cost of running a self-storage property, which should include an onsite manager’s salary if the owner is currently doing the work for free.
Many owners will say some of the assumptions don’t apply to them for various reasons, but I can assure you there are almost no exceptions in the marketplace of real sales.
The self-storage market is experiencing a recent surge in transaction activity involving large and small portfolios. In response to strong privatemarket pricing of self-storage transactions, Green Street Advisors has decreased the capitalization rates used to value the stabilized domestic portfolios of the two largest REITs.
Public Storage, based in Glendale, Calif., is by far the largest company and REIT in the selfstorage industry. Shurgard Storage Centers, based in Seattle, is the second largest self-storage REIT, with a market capitalization just under $2 billion and interests in 599 properties (493 in the United States and 106 stores in seven countries in Europe). Shurgard Europe (Shurgard Self Storage SCA) is now the largest self-storage operator in Europe, with 106 properties in seven countries: Belgium, Denmark, France, Germany, the Netherlands, Sweden and the United Kingdom. Shurgard recently increased its ownership stake in Shurgard Europe from 61 percent to 81 percent through the $101.6 million purchase of equity interests held by AIG (AIG Self Storage GP LLC, AIG Self Storage LP LLC and AIRE Investments SARL) and Deutsche Bank (REIB Europe Operator Ltd. The 47 Shurgard Europe properties in its same-property pool have occupancies stuck in the mid-70- percent range—below proforma stabilized occupancy of 87 percent to 89 percent. Domestically, Shurgard acquired a $90.1 million portfolio of 19 self-storage properties in Minneapolis, which was financed entirely with newly issued common shares of stock. Shurgard plans modest future expansion, with 15 new stores added to the 35 newly opened facilities. Sovran just announced new financing arrangements of $300 million of senior, unsecured debt.
Sovran has recently advanced its revenue initiatives and expects to incur $3 million to $4 million in capital expenditures during the year.
Strong performance was shown at stores throughout Florida, Georgia, North Carolina, South Carolina and Virginia, while some of the Arizona, Texas and New England area stores experienced slower than expected growth. Each of the self-storage REITs appears poised for continued income growth as economic activity picks up. As a self-storage real estate professional, I find the fundamental question that seems to come up at the end of almost every business conversation is also the most difficult to answer: What are capitalization (cap) rates today? I 'll go one step further and suggest cap rates may not be the best tool in valuing self-storage properties.
If you’re an astute real estate investor, you understand that a cap rate is one component to arriving at the cash-on-cash return. While the word “arbitrage” is usually thought of as a high finance concept, there may be some viable opportunities that are present in today’s self-storage investment market, even with historically low cap rates.
As you can see, the spreads shrank to around 254 basis points at the top of the real estate boom in 2006 and 2007.
Capitalization rates are used regularly in the self-storage industry to help set real estate prices, but understanding what cap rates are and why they’re useful can be confusing.
Self-storage real estate experts discuss trends in the north-central states, including new development, conversions, occupancies and capitalization rates. The current market fundamentals and historically low interest rates have pushed self-storage property values to record highs and made some owners complacent.
With the possibility of an interest-rate hike looming, now’s the time for self-storage owners and investors to secure financing. In the business of buying and selling self-storage properties, the discussion for buyers and sellers always ends with capitalization rates.
When it comes to property taxes, self-storage owners expect to be treated in a fair, accurate and equitable manner. The self-storage real estate market is in high gear, but challenges loom for both buyers and sellers. Devon Self Storage CEO Ken Nitzberg shares his thoughts on the self-storage market by taking a closer look at the three factors he believes are driving real estate acquisitions, and where his company fits into the equation. Through observations and deal characteristics, real estate expert Ben Vestal makes a case for why secondary markets are the next big investment opportunity for the self-storage industry. You may be wondering how to put a value on your self-storage facility and if recent events in the financial markets have affected what your property is worth. The first concept to understand is value is based on cash flow, not on how much you paid for the property, how long you’ve owned it or how much it cost to build. Cap rates have been declining, and cap and yield rates continue to decline, according to the most recent self-storage investor surveys by PricewaterhouseCoopers (formerly Korpacz).

The accompanying direct-capitalization model assumes the self-storage facility is operating at its long-term level of economic occupancy. Though good-quality, stabilized facilities are in the most demand, limited available product has caused some investors to consider the purchase of unstabilized, “lower quality" or “value-added” assets. Self-storage investment conditions have improved significantly over the past four years as a result of the industry's outstanding performance. Charles Ray Wilson is the founder of Self Storage Data Services Inc., an independent research firm that maintains the nation’s largest database of self-storage operating statistics.
It’s also assumed the operating expenses include an off-site management fee over and above the onsite management expense.
In the end, ignoring these assumptions is, at best, self-deception and, at worst, can have serious impacts on the financing or sale of a property. The variations from normal cap rates (today between 6.5 percent and 8 percent) usually reflect the quality of the project and the risk to the investor.
Property valuations are somewhat subjective, but our collective experience would indicate that knowledgeable buyers and sellers agree on the quality of the NOI and with the risk variances that lie in the very narrow range of cap rates.
If cap rates did not reflect the marketplace accurately, we would not be using them in so many ways. While each of the self-storage REITs is currently trading near its individual 52- week high, these investment trusts have been less active in acquisitions over the last two years. Its companywide average occupancy levels increased from about 85 percent last year to more than 91 percent. The company plans improvements to existing operations by renovating up to 40 older properties on an annual basis.
Shurgard, founded in 1972, has a total portfolio of 38.2 million square feet of rentable space. These facilities (17 of which have stabilized occupancies) are operated as Minnesota Mini-Storage, but will be rebranded under the Shurgard name.
Company focus will include upgrading 75 to 80 stores, many of which are 20 to 25 years old. Sovran operates its stores under the name Uncle Bob’s Self-Storage and owns and operates 266 facilities. A total of $209 million was used to repay outstanding balances, and the remainder of the financing package will be used to fund acquisitions and improve and expand existing self-storage properties. The Dri-Guard humidity-control program is installed at 54 stores, encompassing 700,000 square feet.
The company could sell some facilities based on market conditions and acquire facilities with high growth potential.
Unfortunately, most people don’t understand the impact this one simple number has on the overall value of a self-storage property and, more important, what goes into arriving at an appropriate cap rate for a property.
In today’s yield-hungry investment market, I find investors are more concerned with the cash-on-cash returns they’ll receive when buying a property than with the actual cap rate.
Today, a more appropriate question a buyer or seller may consider asking is what are the terms of the debt one can obtain on this property? The term “arbitrage” means an investor has the opportunity to take advantage of some pricing or other discrepancies in the marketplace. The green line indicates the average cap rates for self-storage properties over the last 10 years.
The spreads expanded to 531 basis points at the height financial crisis in 2009 (who can forget that?).
Learn how to evaluate your options and develop a sound strategy to maximize your investment. Here are three ways for owners to spot errors, inaccuracies and inequities in their self-storage property taxes.
Here’s a closer look at how a rise in interest rates could affect a property’s value and the selling process. The report includes information on interest-rate volatility and its effect on the self-storage market.
Perhaps you’re considering selling or refinancing, or simply want to know the value for estate-planning purposes. Hopefully, your property is worth more today than it was when you bought or built it, but time alone doesn’t cause income property to appreciate. With new capital (equity and debt), cap rates have decreased 45 basis points to an average of 7.3 percent (stabilized) from one year ago. If the facility is not stabilized, the appraiser must estimate the value of the rent loss between today's level of performance and stabilization, and then deduct that amount from the stabilized value estimate.

Public and private real estate investment trusts as well as large national and regional companies are competitively bidding on the limited supply of available investment-grade sites. He’s an internationally recognized leader in providing independent research on the self-storage industry. This will range between 4 percent and 6 percent of gross revenue depending on the size of the property.
For example, a 40 percent vacant, metal-building project in a rural area would require a higher cap rate to reflect the increased risk and lesser-quality asset. Public Storage has 1,411 properties in 37 states, with geographic concentrations in California, Florida, Illinois and Texas.
The increase, however, is partly due to about $5 million in promotional discounts on rentals and television advertising costs. The company has not acquired any new facilities recently, although 44 projects are under construction, expanding or remodeling. Using the stock price on the day the deal was announced, Shurgard anticipates achieving a 9.4 percent initial yield. Uncle Bob’s facilities are predominantly located in the eastern United States, Arizona and Texas. He is an expert in the disposition, acquisition and evaluation of self-storage facilities nationwide, as well as a featured speaker and author regarding market trends in the self-storage industry. The current aggressive debt market has caused cap rates for self-storage properties to compress to historically low levels. A cap rate, in basic terms, is the unleveraged return an investor can expect without putting debt on the property. In 2012, the spread hovered around 486 basis points, which has enabled buyers to pay very aggressive prices while generating compelling cash-on-cash returns.
Regardless of the reason, the methodology of determining your property’s value is the same. There are only two factors that affect property value: net operating income (NOI) and the capitalization rate (cap rate). Investor demand for good-quality, stabilized facilities is pushing cap rates down and values up to near pre-recessionary levels in many markets. On the other hand, a large masonry project with full security in a growing metropolitan area with consistently increasing rents would command a premium cap rate, perhaps in the range of 6 percent to 7 percent. Please keep in mind it takes into consideration all self-storage properties around the country. It was founded in 1972 by recently retired CEO Wayne Hughes, whose family owns approximately 36 percent of the company at a value of nearly $1.8 billion. Other plans include the closure of 28 pick-up and delivery storage facilities and an exit from the Knoxville, Tenn., market through the sale of four facilities. With 15.4 million square feet, it is the fifth largest self-storage company in the United States.
The company’s call center has become fully operational as an integrated sales and reservation system. However, I’ve recently found myself asking the question, is the property making the investor money, or is the debt making the investor money?
NOI is calculated the same way now as it has always been, but recent turmoil in the financial markets and economy have pushed cap rates higher.
Remember, a property in a small city or town will not command the same low cap rate as one in San Francisco or Midtown Manhattan.
Founded in 1982, the company had its initial public offering in June 1995 and is traded on the New York Stock Exchange. The 10-Year Treasury is the benchmark for most commercial real estate loans, and financial institutions will use this rate plus an additional spread to arrive at an all-in interest rate that will be offered to the borrower.
NOI is the money left after all operating expenses are paid, excluding debt service and depreciation.
The red line, then, indicates the spread each year between the cap rate and 10-Year Treasury and will give you a feel for the “arbitrage” buyers have been able to obtain over the last 10 years. You can see that monthly potential rent flows into annual potential rent, to which is added other income and from which is subtracted economic vacancy. It’s important that NOI be calculated for all self-storage facilities using industry-standard parameters for other income and operating expenses.

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