Determining market rent levels is a challenge for appraisers, especially now as we navigate the impact of the COVID-19 Pandemic. Most facilities have seen upticks in occupancy since the onset of the Pandemic due to increases in temporary demand.
Historically, as demand increases self storage operators have the ability to push rents higher. However, as most individuals and commercial industries have been impacted by the pandemic, most operators are hesitant to increase rates. Most operators have already begun experiencing an increased number of delinquencies beginning as early as April 2020 and this trend is tracking to continue for months following.
If operators were to push rental rates higher, even though occupancy rates have temporarily strengthened, delinquencies and liens would likely increase even higher. As a result, determining market rent levels is more challenging than ever considering the current economic climate.
There are several components involved in determining market rental rates, which include the subject’s asking rate (street rate), actual rate (current average rate being achieved) and occupancy rate of the individual unit sizes. These indicators are utilized for comparison with the rental range of rent comparable data. Since unit mixes vary at every facility, it is common to focus on market standard unit sizes (5 x 5, 5 x 10, 10 x 10, 10 x 15 , etc.). In the past, it was common for market participants to utilize proforma rent levels based on asking rates. However, times have changed and individuals, buyers and lenders are more interested in what facilities are actually collecting.
The following table reflects an example of how we compare historical regional trends against the national average to gauge the strength of the larger market.
After getting perspective on trends in the region, emphasis is placed on the subject’s performance and local rent comparable data. The following table provides a sample of how we determine market rent levels, while analyzing all the factors involved.
Rent levels are concluded by analyzing the asking and actual rent levels at the subject, the current occupancy, as well as the rent comparable range. A typical trend for self storage facilities is as the square footage of the unit size increases the rent per square foot decreases.
Market rent is generally concluded on an individual unit type basis. Units are judged by their occupancy level, their conformance to the logical price per SF trend expected and relation to the comparable data.
Considering current economic conditions, as a result of the COVID-19 Pandemic, it would be prudent not to overstate market rent due to recent temporary occupancy increases or other temporary factors. Historically, market rents have seen increases between 2% to 7% annually. However, most operators and market participants are now forecasting more modest rental increases for the remainder of 2020 and are curbing market rent projections until the dust has settled. Considering the uncertainty within the market, the best indicator of market rent is the actual rent being achieved by your facility. Is the actual rent being achieved supported by market comparable data? While there might be upside rent potential and room for increasing rental rates, most market participants, buyers and lenders are being overly cautious in projecting market rent as a result of the recent Pandemic.
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Decide wisely between SBA and traditional loans for your self-storage business. SBA offers lower down payments, but traditional loans provide lender reliability. Make informed investment choices for your storage facility.