The Key Drivers of Self-Storage Valuation: What You Need to Know

May 26, 2023

Self-Storage Income: Understanding Valuation and Acquisition

Today, we’ll be talking about understanding the valuation and acquisition of self-storage facilities. It’s a challenging topic, especially for those who are just starting in the industry. But don’t worry, we’ve got you covered!

Property Management and Software

In today's technological landscape, it's more important than ever to have the proper tools at your disposal to help you maximize your efforts effectively and efficiently. There are lots of options out there to help you in terms of technology and software, but one of the best ways to optimize management and increase the value of your self-storage facility is through effective property management. You need good property management software to do that. We like to use Tenant Inc. They provide a variety of tools to help you maximize the value of your storage facility. Check them out if you’re looking for an all-in-one solution for property management.

Valuation: The Art and Science

When it comes to valuation, there’s both an art and a science to it. It’s not just about using a formula or dealing with only the knowns. Multiple aspects contribute to the value, and you need to look at it from every angle to get a more accurate picture. This can be challenging for beginners who might be looking at it one-dimensionally.

Drivers of Valuation

It's essential to understand what drives the valuation of a self-storage facility. These drivers include occupancy rate, rental rates, unit mix, location, competition, and overall demand. These factors are critical in determining the value of a storage facility.

When we talk about Valuation Drivers, we're talking about a few things. Let's briefly cover some of the key factors that drive valuation.

  • Occupancy Rate

Occupancy rate refers to the percentage of units that are rented. A higher occupancy rate means more income for the facility, which translates to higher valuation. On the other hand, a low occupancy rate can negatively impact the valuation of the facility.

  • Rental Rates

Rental rates are also a critical driver of valuation. Higher rental rates mean higher income, and thus, a higher valuation. The location of the facility, unit size, and competition can affect the rental rates.

  • Unit Mix

The mix of units is also a factor in determining valuation. A facility with a diverse mix of unit sizes can attract a wider range of customers, which can positively impact the facility’s valuation.

  • Location

Location is one of the most crucial drivers of valuation. A self-storage facility located in a prime area, such as a busy intersection or near a major highway, can command higher rental rates and occupancy rates, which translates to higher valuation.

  • Competition

Competition is another significant driver of valuation. A facility that is the only one in the area can command higher rental rates and occupancy rates. However, if there are several other facilities in the area, the competition can negatively impact the valuation of the facility.

  • Overall Demand

Finally, overall demand for self-storage in the area is another critical factor. If the demand is high, the facility can command higher rental rates and occupancy rates, which positively impacts the valuation.

Dynamic Valuation in Self-Storage Income

Valuation in the self-storage industry is dynamic and changes rapidly. The marketplace can turn and run, and valuations can change in real-time. The perceived inputs or actual inputs to valuation can change quickly, causing the valuation of an asset to fluctuate significantly.

For instance, an asset with net revenue that didn't change could have swung millions in value within a short period. This is because of extrinsic factors such as the buying and selling of assets, which can value it differently than it did six months ago on the same intrinsic value.

Understanding Valuation Drivers

To understand valuation drivers, we need to consider three core factors: assets, execution, and revenue. When talking about revenue, we are not only looking at how much the revenue is but also at the reliability of the revenue stream. Different revenues, businesses, and assets have different safety factors, which affect the predictability and security of the revenue stream.

Moreover, the individual that's buying an asset has different strengths, which can affect the inputs to valuation. While one input to value may be lower for one person, it may be a strength for another person. This positioning of valuation is more dynamic than people realize, and missing a component of valuation can affect how a buyer values an asset.

Macro-economic Impacts on Valuation

The self-storage industry has experienced significant macro-economic impacts that have affected valuation. For instance, valuations cap rates had gone down, and valuations were through the roof, making it challenging for buyers to find affordable assets. Valuations can change quickly in response to macro-economic impacts, making it essential to stay informed about market trends and developments.

Opportunities and Risks in Valuation

Valuation in the self-storage industry can present both opportunities and risks. An adjustment in valuation may bring an asset down to a good level, or it may still be overpriced. Therefore, it's crucial to understand the inputs and drivers to valuation to make informed investment decisions.

Understanding the valuation and acquisition of self-storage facilities is critical for anyone looking to invest in the industry. The drivers of valuation include occupancy rate, rental rates, unit mix, location, competition, and overall demand. Moreover, valuation in the self-storage industry is dynamic and changes rapidly, making it essential to stay informed about market trends and developments. 

While valuation can present both opportunities and risks, having a comprehensive understanding of the inputs and drivers to valuation can help investors make informed investment decisions. Finally, utilizing good property management software such as Tenant Inc. can help optimize management and increase the value of self-storage facilities.

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