KPI's to Look at When Purchasing a Self-Storage Facility
By Alyssa Browning
The self-storage industry is one that has been constantly growing in recent years. In addition to new construction, the industry has been experiencing an increase in conversions and purchases. The expected growth for 2019 is 2.9% overall with a decrease in new builds but completion of current projects. The Compounded Annual Growth Rate (CAGR) is expected to grow up to 134% between 2020 and 2024. With this information you may wonder what key indicators you should be focused on when looking at purchasing a new facility. Capitalization (cap) rates, occupancy, opportunities for expansion or conversion, and the demand for specific unit types are all factors that should be considered.
To begin, cap rates are one of the best indicators of the value of a self-storage property. This Key Performance Indicator (KPI) allows you to estimate what you can expect to earn, as a percentage, from the property you are evaluating. This measurement is used most often because it helps accurately compare facilities in different markets. The cap rate is determined by dividing the net operating income by the purchase price of the facility. One you have determined the cap rate you are able to see a snapshot of the quality and risk associated with the facility you are thinking of purchasing. Essentially, if you have a high cap rate then the property has a generally low value. This also works on the flip side; if you have a low cap rate then the property has a generally higher value. If the property has a lower cap rate that is good for you as a seller because you are purchasing low and may have the option to increase the value of the property and sell it later.
Another KPI that is important to evaluate when making a purchase decision is occupancy. Here you should be evaluating both physical and economic occupancy. This is because a facility might have good physical occupancy, but upon further evaluation you may find that most of the tenants have a rate far below street rates. On the flip side you may find a facility that appears to have poor occupancy when you look at physical occupancy, but may have higher street rates with tenants paying full price, thus increasing economic occupancy.
To continue, population density should be another consideration for anyone purchasing a self-storage facility. According to Frank Rolfe of Self Storage University, it’s a myth that you can build or buy a facility anywhere, even somewhere rural, and have it fill up. It’s important to consider that there is enough demand in your area to make a self storage facility feasible. On the flip side, it is important to make sure that your market is not oversaturated. For example, Rolfe says that "the best markets have ratios less than 6" meaning that for example, a "market of 100,000 population should not have more than 600,000 square feet of space available". If the market is oversaturated it will be more difficult to have success. In addition to these criteria you should consider the rental price per square foot. Although variable, a good self storage market will have rental rates at about one dollar per square foot.
Additionally, opportunities for expansion or conversion may be helpful in your search for purchasing a property. Having the option to expand a facility you are purchasing or converting an old building into something great could have a dramatic impact on the facilities success. Conversions in particular are a good opportunity because generally speaking they take less time to complete than building a facility from the ground up. Furthermore, conversions typically have less difficulty with zoning, and financing. The drawback to a conversion is you must know what you are getting when you purchase a building. Surprises are no fun in this instance.
Finally, knowing the demand for specific unit types in the area surrounding the facility will give you additional insight. For example, if a facility has only 5 usable 10 x10 spaces but demand for 10 x 10 spaces is extremely high it may be wise to look at converting some other, less requested spaces, into 10 x 10 units. This gives you the opportunity to increase occupancy and even raise rents.
Overall the self-storage industry is one that is considered a great investment opportunity. The industry is continuing to grow and has many facilities for sale. Capitalization rates, occupancy, opportunities for expansion or conversion, and the demand for specific unit types are all factors that should be considered when evaluating facilities. Once you have your facility picked out there are a multitude of next steps. Check out these getting started videos to learn more about the self-storage industry and breaking in!