And now for the rest of the story… By Jane H. Sauls, CCIM & Luke Sauls The storage industry has been fast and furious for over four years. Owners and investors enjoyed significant annual rental growth in markets nationwide. According to Green Street Commercial Property Price Index, valuations peaked early 2022 with an increase of 66% compared to pre-covid numbers. For perspective, Greenstreet reported all property asset classes increased by an average of 14%. So once again self storage comes through like a knight in shining armor. Secondary and tertiary markets became as popular as the primary markets attracting attention from the largest of operators, as many families returned to more rural settings to live, work remotely, and play. The continuous buzz in the industry was the historically low cap rates, making cap rates the golden child and to some the only child. A cap rate is the ratio between purchase price and net operating income. In other words, by converting income to value, a cap rate expresses the relationship between one year’s income and value. (CCIM Glossary) In theory, cap rates allow investors to make apple -to- apple comparisons of assets by only considering the twelve months of revenue and expenses that would remain a part of the operating business when the property is sold. For example, depreciation and interest expenses are not deducted in the NOI calculation because that is subject to the new owner. However, the reality is that cap rates do not take into account if the facility is at market rental rates, the current (or future) management platform, new improvements, if there is deferred maintenance or land to expand. Cap rates are a snapshot of the investment and not a true testament to how hard your money will work or is working. Cap rates are often times the focus of attention because they are easy back of napkin calculations. They have dangerously become the center of attention to unseasoned investors and owners. Basically, the cap rate is a single page in the book and you need to read the entire book before making an investment decision. The internal rate of return is the entire story from beginning to end. It’s everything that you put into the property and everything that you get out of the property, including the income each year plus the sales proceeds.
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