Retail News Blog

There have been fewer sales in 2008 and 2009 than seen in previous years. The reduced number of sales is due in some degree to the lack of credit available and the particular aversion to risk on behalf of lenders as well as investors in the current market. The uncertainty surrounding the ultimate fallout from the downturn in the national economy has led to a pullback from both lenders and investors. While buyers view the market with some skepticism and expect an increase in rates, sellers have remained optimistic or are unwilling to believe that capitalization rates may have risen from historic lows of the mid-2000s when many properties traded in the 6.0% to 7.0% range.

In a published article by Royce Rowles of PGP Valuation Inc, Royce discusses the ratio between annual net income and sales prices.

“While the NOI may be falling at many properties (due to increased vacancy rates and/or more competitive rental rates), it almost certainly does not account for the entire value decline in this market. Major value declines also come from the changing status quo between buyers and sellers. Buyers have become much more patient and are expecting a much more favorable ratio between their NOI and purchase price. In other words, when there are fewer buyers (as often is the case in a down market) capitalization rates move upward. In situations where there are recent comparable sales, anyone valuing a property can easily extract and apply very current and realistic capitalization rates to estimate Market Value. This is because during times of appreciation, the market is usually active. Extracting supportable capitalization rates is easy. However, when transactions are scarce finding market capitalization rates can be significantly harder. When this happens, oftentimes sellers have an unrealistic opinion of value because they are relying on dated capitalization rate sources.”

So how do you extract capitalization rates, when transactions have been scarce? The following page discusses five ways to analyze capitalization rates.

National Surveys

According to the 2^nd Quarter 2009 National Investor Survey prepared by Korpacz, capitalization rates for self-storage facilities range from 7.00% to 10.00% with an average of 8.55%. Korpacz is just one of several national surveys providing important perspective relating to overall trends in the market. It’s important to not place too much emphasis on national surveys as there may be wide fluctuations in regional and local markets. However, a national survey is an important starting point to get an overall perspective of what capitalization rates are doing on a national level.

Existing Sales

In analyzing existing sales over the last couple of years, the older the transaction dates the superior the marketing conditions. In almost all cases, this outweighs some of the less important qualitative adjustments such as quality, condition, and age. As appraisers, it is more important to select more current sales outside the market than older sales within the market area.

Capitalization rates for self storage facilities have increased 100 to 150 basis points over the last 12-18 months, with typical capitalization rates ranging from 8.0% to 10%. Transactions sub 8.0% are hard to find in this economy. It seems like the days for buying a property based on a ”Pro Forma” is gone. Buyers will only look at current in place income and expenses, since this is how lenders are underwriting properties. Here is what we are see regarding capitalization rates in this market:

• Good quality / good location (8.0% – 8.5%)
• Average quality / average location (8.75% – 9.5%)
• Fair quality / poor or saturated location (10% – 12%)

Band of Investment Technique

Because most properties are purchased with debt and equity capital, the overall capitalization rate must satisfy the market return requirements of both investment positions. Lenders must anticipate receiving a competitive interest rate commensurate with the perceived risk of the investment or they will not make funds available. Lenders also require that the principal amount of the loan be repaid through period amortization payments. Similarly, equity investors must anticipate receiving a competitive equity cash return commensurate with the perceived risk or they will invest their funds elsewhere.

Effective Gross Income Multiplier Method (EGIM)

This multiplier is used as an indicator of value and takes into consideration the proportion of expense to every dollar of effective gross income. It is derived by dividing the sale price by the Effective Gross Income. Typically, effective gross income multipliers, which are derived and applied before considering expenses, are used without adjustments. The expected trend is as expense ratios increase multipliers decrease. It is common to put weight on those comparables with similar expense ratios (% of Effective gross income). The following table is a sample.

Broker/Listing

Brokers’ perspective are very important, as they have a pulse of what is going on in the area. Appraisers typically quote brokers in their reports, as well as provide several listings. Below is a sample of self storage listings currently on the market throughout the country.