Though self-storage facility values have declined since their peak in 2007, the industry has outperformed all other real estate types during the recession, and that has once again garnered the attention of investors. Self-storage as an industry is also becoming more transparent. Econometric models designed to measure supply and demand have improved, which allows investors to feel more comfortable with their risk-assessment calculations.

Key industry brokers, property owners and managers still use direct capitalization and discounted cash flow as primary tools of the income approach to estimating facility value. They use the sales-comparison approach as support. For the purposes of this article, I'll focus primarily on direct capitalization as a method for determining value.

Direct Capitalization

While there has been some pretty dramatic changes in self-storage operating performance, i.e., declines in occupancy and rental rates, greater use of concessions, etc., the method investors and appraisers use to estimate facility value has not changedonly the depth and sophistication of the analysis. The value of all real estate is still the present worth of future cash flow.

Thus, the appraisers job is to assess the local market conditions that will influence a property's future net operating income (NOI). An analysis of these conditions is the foundation on which an objective opinion of value can be reached.

The basis of direct capitalization starts with making an estimate of the facility's potential gross income, which involves a detailed analysis of asking and actual rental rates by unit type compared to competitors in the local market. Then an estimate of the stabilized vacancy is made, based on the current supply of competitive units in the market. Vacancy is comprised of three main components: stabilized physical vacancy, collection loss and concessions.

Next, the appraiser must estimate total operating expenses, which typically include:

• Real estate taxes
• Property insurance
• Repairs and maintenance
• Administration
• Onsite management
• Offsite management
• Utilities
• Advertising
• Miscellaneous

NOI is derived by subtracting vacancy and operating expenses from the estimate of potential gross income. Its then capitalized into a value estimate by dividing it by the cap rate. The appraiser must select an overall cap rate that reflects facility quality and location and the risk of its future performance.

Investors consider the gap between class-A and -B self-storage facilities to be much smaller than the gap between class-B and -C properties. Cap rates for stabilized, class-A assets can fall below 7 percent, but tend to hover near the low to mid 7 percent range for class-B assets. The market generally indicates that overall cap rates for class-B assets are 25 to 50 basis points higher than class-A assets. For class-C assets, the spread increases to as much as 100 basis points. Thus, class-C cap rates can be 8.5 percent or higher, depending on quality and location.

Cap rates have been declining, and cap and yield rates continue to decline, according to the most recent self-storage investor surveys by PricewaterhouseCoopers (formerly Korpacz). With new capital (equity and debt), cap rates have decreased 45 basis points to an average of 7.3 percent (stabilized) from one year ago.

The accompanying direct-capitalization model assumes the self-storage facility is operating at its long-term level of economic occupancy. If the facility is not stabilized, the appraiser must estimate the value of the rent loss between today's level of performance and stabilization, and then deduct that amount from the stabilized value estimate.

Though good-quality, stabilized facilities are in the most demand, limited available product has caused some investors to consider the purchase of unstabilized, lower quality" or value-added assets. This is bringing more focus on facility classification as it relates to investment risk.

Self-storage investment conditions have improved significantly over the past four years as a result of the industry's outstanding performance. Public and private real estate investment trusts as well as large national and regional companies are competitively bidding on the limited supply of available investment-grade sites. Investor demand for good-quality, stabilized facilities is pushing cap rates down and values up to near pre-recessionary levels in many markets.

Charles Ray Wilson is the founder of Self Storage Data Services Inc., an independent research firm that maintains the nations largest database of self-storage operating statistics. Hes an internationally recognized leader in providing independent research on the self-storage industry. For more information, visit www.ssdata.net.

Through its publicly held real estate investment trust (REIT) affiliate CPA: 17 Global, self-storage investor W. P. Carey & Co. LLC has acquired five self-storage facilities across Alabama (1), Louisiana (1) and Mississippi (3) for approximately $17 million. The acquisition comprises approximately 385,000 square feet.

The properties will be rebranded under the CubeSmart name and managed by the self-storage REITs property-management division.

"The addition of these assets adds both diversity and further stability to our portfolio, in line with our objective of providing consistent long-term income and is a strong addition to our managed funds," said W. P. Carey President and CEO Trevor Bond.

W. P. Carey Executive Director Liz Raun Schlesinger added, "We believe that adding these seasoned assets while retaining the experienced CubeSmart management team will enhance the value and stability of this investment. We know the CubeSmart management team well and look forward to working with them to maximize the value of these assets for our investors."

W. P. Carey & Co. LLC is an investment-management company that oversees a global investment portfolio of $12 billion. It provides companies worldwide with long-term sale leaseback and build-to-suit financing, and engages in other types of real estate-related investment.

CubeSmart owns or manages 481 self-storage facilities across the United States and operates the CubeSmart Network, which consists of approximately 825 additional self-storage facilities.

Air Station Storage opened in March in Jacksonville, N.C. The facility, 1121 Old Maplehurst Road, features 242 climate-control and non-climate-controlled units.

With more than 33,000 square feet of storage space, the facility also offers boat and RV parking, U-Haul truck rental, and moving supplies. A second phase is currently in development.

The property was built and will be managed by Robert High Development, which constructs, develops and manages self-storage facilities. The company oversees the operation of Coastal Mini Storage, which has multiple locations along the Atlantic Coast.

The facility is owned by Bailey and Fuller LLC, a Jacksonville, N.C., company that develops and manages commercial properties.

PTI Security Systems, manufacturer of the Digitech and PTI brands of self-storage access-control systems, has released DigiGate software for the 64-bit version of Windows 7. The new version allows facility operators who use the Digitech access-control system to install and operate the software natively on computers with 64-bit Windows 7.

DigiGate system controllers manage devices for facility access and exit, timed activities, and alarm monitoring. DigiGate system software provides management flexibility and operates with user log-ins and customized security levels.

We know many of our loyal Digitech customers will breathe a sigh of relief having this version available," said Lance Comstock, president of PTI. "The release of this software confirms our commitment to continuing sales and support of the Digitech product line."

Comstock, the founder and former owner of PTI Integrated Systems Inc., purchased the PTI and Digitech International Inc. brands from Chamberlain Access Solutions Inc. in October. The security products are now sold through Comstocks new company, PTI Security Systems, which has more than 20,000 product installations worldwide.

Another Attic Self Storage in Texas is turning its lien auctions into a charity drive for local nonprofit organizations.

This Friday, the self-storage operator will host auctions at five of its locations, with all proceeds of the sales going to charity. A storage unit will be designated for each charity prior to the auction.

The charities benefiting include Habitat for Humanity, Mission Amarillo, 7 Star Therapeutic Riding Center, Cub Scouts Pack 701, ACTS Community, Faith City Mission and America Supports You Texas.

The auction will begin at 9 a.m. at Another Attics Tradewinds Airport facility, 1500 S.E. 34th Ave. Auctions at the other facilities will occur in succession that morning. The self-storage company plans to host charity auctions on a regular basis.

KwikN Self Storage near Tyrone, Pa., was sold to a local self-storage investor for $315,000. The facility, which is currently 94 percent occupied, covers 6,600 square feet and has 54 drive-up exterior units. The sale also included land and the approval to build an additional 19,800 square feet of self-storage. It is not clear if the facility will be rebranded.

The property is on Old Route 220, southeast of Tyrone and approximately 20 miles southwest of State College, which is home to Penn State University.

John H. Gilliland, president of Investment Real Estate LLC (IRE), represented both the seller and the buyer in the transaction. IRE provides self-storage brokerage, construction, feasibility and consulting services in the Northeastern and Mid-Atlantic states.

ONeil Software, a provider of software solutions for records centers worldwide, recently attained new Gold Certified status as part of the Microsoft Partner Program, with a competency in ISV/Software Solutions. The company was also recently granted Gold Motorola PartnerEmpower status.

Gold Certified status recognizes ONeils expertise with Microsoft technologies and the company's ability to meet customers needs. Certified Partners receive benefits including access, training and support.

The ISV/Software Solutions competency recognizes the skill and focus Microsoft partners bring to a particular solution set. Partners who have obtained this competency have a successful record of developing and marketing packed software based on Microsoft technologies. O'Neil was able to declare this competency with its RS-SQL records-management software.

Motorola PartnerEmpower is a new program that recognizes Motorola channel partners for their expertise and success at "delivering innovative solutions that help customers make critical decisions, streamline processes and improve results," according to Motorola.com. ONeil Software has been granted the designation "PartnerEmpower Program Level Gold; Technology Segments Mobile Computing and Advanced Data Capture; Specialization Levels - Specialist."

ONeil serves more than 1,000 records centers in more than 80 countries, ranging from start-ups to multi-national companies. In addition to software, the company specializes in barcode tracking, portable printers, wireless handhelds and Web technology.

By Jamie Lindau

On paper, self-storage development seems like an easy and profitable way for people to get into business for themselves. The buildings can be the most basic construction available, and there just doesn’t seem to be a downside. In reality, once you get into the process, it’s much more complicated than it looks. A new self-storage developer must make many choices today that will impact him for decades to come.

The bad news: In the last five years I’ve seen more people go bankrupt building self-storage than in the previous 20 years. In most cases, factors leading to failure include building in a poor location, building too many units, or construction costs that couldn’t be supported by the area’s rental rates.

The good news: In the last four years, there has been limited new development, allowing time for existing facilities to fill and stabilize. As a result, there are more opportunities for a new developer to locate a building site where demand exists. Here’s an in-depth look at the key areas every new owner or developer needs to understand when building a new facility.

Selecting a Self-Storage Location

The biggest concern for owners today is to make sure the area has demand for more units. Owners/developers should do a preliminary search of the competition to evaluate the market. If you see sites that are three or four years old and are only at 70 percent occupancy, this tells you the market is still soft and you should look somewhere else.

If you find an area where the facilities have an occupancy of more than 90 percent, it might need further study. However, before hiring a feasibility consultant, do a thorough investigation of the available land that might be good for self-storage development.

First, you need to know what kind of zoning is required to develop self-storage in the area. Zoning is often the biggest hurdle. You might find a great location, but if it’s zoned with a C-1 classification and self-storage is only allowed in “business highway” or “light industrial,” you may be chasing your tail. It’s important to find land on which you can actually build.

Ideally, you’re looking for an affordable, properly zoned, flat, highly visible piece of property with a high traffic count, which is close to population centers (or at least closer than the competition). You’ll rarely find all of those qualities in the same parcel. Once you find a piece of property that fits your criteria, hopefully it will be large enough to build a profitable self-storage facility.

Economic Feasibility

Now we get to the economic feasibility of the site. There are many scenarios you may need to consider to determine if you can build a profitable business.

There are many ways to lay out a site. It’s important to maximize potential profit through your design, but you still need to be able to consistently keep the facility full. Many people say, “I want to make sure I have all drive-up units.” Customers may prefer this for convenience, but the design may lose too much land to driveway space and, therefore, may not be the best choice in all areas.

When looking to maximize the profitability of a site, first consider extra-wide, single-story buildings. This increases your percentage of rentable square footage on the land. By adding climate control to the interior units in the middle of the building, you can also increase the rental rates. Adding additional levels is another approach, although the expense of an elevator and space consumed by stairwells cuts into the bottom line. Armed with competitor rates in your area and ballpark building costs, you can begin to evaluate whether to continue exploring a particular site.

Creating and Executing a Site Plan

When developing your site plan, make sure you have an attractive, functional office layout with good curb appeal. The layout should allow your customers to get into the office without going through the gate. Place the gate keypad so there’s room for a car or truck to pull in and enter a code without blocking the street or sidewalks. Design the driveways to flow throughout the site and exit through that same gate if possible. Avoid creating dead ends, as the last thing you want is drivers backing out of an aisle. The general public isn’t good at driving backward, especially in a rental truck.

Once you have a good idea of where and how you want to build, take the plan to the city planning authority for review. In many areas, you’ll need to conform to the recommendations of the architectural review board. This means they may dictate how your project must look. Developers are often irritated when the city issues requirements that cost them money, but in some respects, they’re forcing you into building a nicer facility that will most likely help you rent units.

That being said, you’ll still have to make sure you can afford all these extras while making the project economically feasible. In some communities, meeting the architectural standards is so costly that you cannot get enough rent out of the project to make it viable. In these areas, you may find the city is more receptive to a plan that involves converting an existing vacant building into self-storage.

Working With a Team

Once your plans are approved from the planning commission, you’ll need to build a team of experts to ensure the project is constructed properly and on time. One of the most visible choices you’ll make is your building type. Look for a building supplier and builder with experience in the structures you’re planning to build, and visit sites of their other customers to see the buildings in person.

Choosing buildings may seem simple, but there are a number of variables to consider. If your quotes are coming in with wide variation, dig in and find out why. Consider the long-term effects of your construction type on maintenance and insurance expenses. For example, steel buildings are less costly to insure than wood-frame ones.

After you decide on a building layout, you’ll need to hire a site engineer to ensure it functions with the drainage on your site. It’s imperative you have a properly drained facility. In my experience, this is one of the most common mistakes on existing sites.

Some owners/developers will often serve as their own general contractor. However, on larger projects or those that are complex, it’s a good idea to hire a general contractor to oversee construction. If you do plan to be your own general contractor, it’s imperative you work with qualified subcontractors.

No matter what you have on paper for that grading plan, there will always be issues. The grading and concrete contractors can make or break your project, and problems with the foundation or grading/drainage are not easily remedied. A classic mistake is after the foundation is installed and the concrete contractor is paid, your building erector shows you all the mistakes that were made. At that point, you no longer have any leverage to make the necessary changes.

When I talk to existing self-storage owners, I always ask what they regret from their last project. The No. 1 item is they wished they made the front of their project and office nicer. Don’t skimp on this item. Remember, you’re not just building to compete in your market today, you’re making sure your new project is competing well into the future.

You may see some opportunities in your market to get into self-storage, but be sure you fully review all aspects of your project. Work with experienced people, and they will help guide you to a quality project without repeating the mistakes others have made. Self-storage isn’t a get-rich-quick scheme. It’s a methodically slow business where diligence and hard work pay off in the long run.

Jamie Lindau is a self-storage owner and the director of marketing and product development at Sun Prairie, Wis.-based Trachte Buildings Systems, which designs, manufactures and erects a full line of pre-engineered and customized steel self-storage systems, including single- and multi-story, portable storage, interior partition and corridor, and canopy boat/RV. For more information, call 800.356.5824; visit www.trachte.com.

European realtor Immofinanz Group, which owns 95 percent of Dutch self-storage operator City Box Self-Storage B.V., acquired a self-storage facility in Den Bosch, Netherlands, this month, bringing the total number of City Box properties to 24.

The 700-unit facility is approximately 90 kilometers (about 56 miles) south of Amsterdam and has approximately 5,000 square meters (about 16,400 square feet) of rentable space. Immofinanz acquired a 90 percent stake in City Box in 2007 and increased this holding to 95 percent during the 2009-10 fiscal year.

"We see a growing demand for safe and affordable temporary storage space, not only by private households, but also by self-employed persons and smaller firms," Manfred Wiltschnigg, member of the executive board of Immofinanz Group, told the source. "Our regular travels through our markets always include the evaluation of interesting acquisition targets. With the takeover of an existing self-storage property in Den Bosch, we have acquired an asset that can be optimally integrated into our established City Box chain."

Immofinanz Group is a real estate investor and developer listed on the Vienna Stock Exchange and is considered one of five major real estate companies in Europe.

City Box provides self-storage services for households and businesses in the Netherlands.