One of the main questions that has been posed to appraisers in the self storage industry is how the COVID-19 virus has affected market value. Real estate is an investment type that historically takes a longer period of time to be impacted in relation to alternative investment types.

Based on conversations with multiple market participants, there are several who are taking a “wait and see” approach. It is difficult to forecast the effects both on a near-term and long-term basis. Our opinions and conclusions in our appraisal reports are based on information available and account for market perception as of the date of value in the report.

It is becoming clear that the Coronavirus will have some impact on values moving forward, but to what extent is the question. Unemployment figures climbed significantly across the nation over the last two months. The economic impact will vary depending on property type, class, and location but it is clear that this will directly affect all real estate segments, including the residential market, due to a family’s ability to pay their mortgage or monthly rent.

With over 75% of storage clientele nationwide coming from residential users, initial reaction is rent loss is going to be significant… but has that been the case? Another knee jerk reaction has been that capitalization rates will increase and buyers will demand a price reduction… but have we really seen that?

There are several categories that we feel are important to address when valuing storage facilities at this time, which include Marketing/Exposure Time, Rent Loss, Occupancy, Capitalization Rates, Rent Growth Projections, and Adjustments for Date of Sale. Each of these categories will be described below:

• Marketing/Exposure Time The typical marketing/exposure time over the last couple of years have ranged from 3-4 months; however, considering the current Pandemic and based on conversations with market participants and lenders, we have extended the length of marketing/exposure time to 6-9 months in our reports to account for any delays that might occur.
• Rent Loss We have considered the need to make a short term adjustment to account for the tightening of liquidity and the potential decline in effective income. Our model estimates a temporary rent loss to account for unknown variables. Owners and property management companies are estimating potential rent loss between 5% and 20%, depending on the market and overall location.

Adjustments for Date of Sale – In appraisal reports we rely on the Sales Approach as a check method to support the Income Approach. Market conditions adjustments are based on a review of historical sale data, market participant interviews, and current versus historical pricing from our research. Self-storage values have appreciated between 2% to 3% over the last several years on a national basis, but the implications of COVID-19 suggest nominal growth in the near term. Furthermore, while there has been a spread between the demand rates for Class A/B and Class C facilities over recent years, with high-quality facilities in primary markets recording the largest annual appreciation, this gap in demand is expected to widen due to the capital available to the respective buyer pools for each class.

We are learning that not every sector of real estate is being affected equally during these difficult times. Retail, hospitality, and office have been hit the hardest, while industrial has fared well due to its role in the online supply chain. Then there is Storage, which is a niche property type within the industrial ecosystem. Based on the resiliency that was on display in the last Recession, most experts in the self-storage world believe that although this “pause” is inconvenient, the industry as a whole will be just fine.

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