Eight Key Economic Factors that Affect Self Storage Facility Value
If you’ve found a facility that looks like it would be the perfect acquisition to your portfolio, do you know what the key economic factors are that will affect potential value? Don’t invest your hard-earned money until you’re sure of the potential value of the property.
Common indicators of self storage property values emerge from a combination of performance and market factors. Self storage, though not as volatile as the stock market, is rapidly changing. It’s more important than ever to understand the worth of an asset before you invest. You can lessen the risk by educating yourself and investing your money with a proven leader in the industry like Pinnacle Storage Properties.
Following are some of the factors that affect self storage facility value.
Physical and Economic Occupancy
There are two types of occupancy. Physical occupancy is the number of rented units divided by the property’s total existing units. Economic occupancy is the percentage of units rented for the full asking price. Physical and economic occupancy should be close. High physical and low economic occupancy could mean that too many specials are being given to customers. For example, these specials could be “1st month free with move-in” or “50% off the first two months with autopay.” These concessions are a good marketing tactic to increase occupancy, but only when necessary. Keep in mind that having a facility at 100% occupancy can mean that tenants are not being charged enough.
Net Operating Income (NOI)
Net operating income is income minus expenses. When calculating NOI, don’t forget to deduct reasonable operating expenses. Don’t forget to exclude depreciation, debt service, capital improvements and any non-operating expenses.
Capitalization (CAP) Rate
Self storage properties are valued on their income-producing ability. Cap rates take this income stream and give it a value, based on the property’s ability to produce and maintain future income. Additionally, cap rates consider the perceived risk of maintaining that income stream.
Cap rate is one of the most important calculations a property investor needs to know in order to convert income into property value. The cap rate will vary with rent rates, construction, location and other differences.
Pro Forma Performance
According to Investopedia, a Pro forma forecast is a financial forecast of what to expect in the first year of facility ownership based on income statements, balance sheets, and cash flow statements. The pro forma financial statement includes anticipated future events. For example, can rents be raised, can expenses be trimmed, and can opportunities for ancillary income be added? On the other hand, increases in facility expenses such as taxes and property insurance have to be considered as well.
To begin your demographic research, compare population and median household income in a one-, three- and five-mile radius around your facility. Compare your findings in those areas to the state as a whole to give yourself an explicit picture of area income. In 2020, $68,400.00 was the median household income in the United States. This is up from $63,030.00 in 2019.
Other geographic factors that can have a positive impact on the value of your facility are proximity to a military base, college or university, or major new housing development.
Traffic and Visibility
The number of people regularly seeing your facility is an important metric in measuring value. According to the Parham Group, 85% of your business is from drive-by traffic. Traffic counts and visibility are extremely important. If commute time in the area is between 15 and 40 minutes, the local population is spending a lot of time in their cars. This will lead to residents developing a familiar, convenient traffic pattern. They’ll run errands, eat out, and visit their doctors within this pattern. Older populations are extremely dependent on these patterns.
You should be able to find local traffic statistics on a county or city website, and it doesn’t hurt to drive the patterns yourself. Don’t forget to research sign ordinances and check for possible visibility barriers.
A primary market will enjoy more value than a secondary market because they typically have higher traffic volumes and a more affluent clientele. Buyers are more open to these markets because they show potential and strong growth.
The sales comparison approach estimates a value for a property by using recent sales of similar properties. Then, prices are adjusted to reflect differences in conditions between the comparable and subject properties. A detailed analysis of the local market needs to be done in order to determine what people are paying for self storage facilities.
A self storage property’s value is dependent on a combination of performance and market factors. It’s important to understand the key factors in this article before you invest, buy or sell so that you can make an informed decision by understanding what other investors are willing to spend.