Exploring Cap Rates and Basis Points
Cap rates
Investopedia defines the use of capitalization rates as:
“The capitalization rate (also known as cap rate) is used in the world of commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property.”
Cap rates are calculated by dividing a self-storage or boat and RV storage asset’s net operating income (NOI) by its sale price or by dividing the NOI by the cap rate. This way a developer can decide if it’s worth the investment or not.
A self-storage feasibility consultant uses his or her expertise to assign a cap rate to a proposed facility to evaluate its return on investment. This decision is made by reviewing the cap rates of other facilities that were recently sold in the market and in similar markets.
Basis points
Investopedia defines basis points as:
“Basis points (BPS) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument.”
Basis points reflect interest rates. Those interest rates support the evaluation of a project by tracking the baseline for cap rates. From rises to falls to standstills—basis points indicate how stable a sector is.
Capitalization Rates in Self-Storage
Just like any investment, you’re hoping for a return. To put it simply, cap rates are measures used to estimate and compare the rates of return on multiple commercial real estate properties.
This applies to self-storage the way it applies to any real estate investment. You need to know the numbers to take proper action.
Cap rates are set by the seller, and your cap rate as a buyer may be different. Self-storage feasibility study consultants set cap rates based on their understanding of the market. Cap rates will shift from market to market. The cap rate should indicate the level of investment risk. The lower the cap rate, the higher the value, and contrarywise, the higher the cap rate, the lower the value.
A few indicators of a higher cap rate are poor visibility from the street or poor location, lacking amenities, low occupancy, and too much competition in the market. Indicators associated with lower cap rates are well designed facility layouts, security measures, high occupancy, and low delinquencies.
A self-storage feasibility study or boat and RV storage feasibility study can help determine if those indicators are present in the competition, and bring clarity to developers.
What is a good cap rate in self-storage?
The answer to this question is dependent on multiple factors and may shift based on the variety of the facility in question and the market. Cap rates are reflected in the occupancy and location of a facility—which will vary.
A self-storage facility in one segment of a rural Arkansas area will have different rates, offerings, unit types, and occupancy data than one in the same rural area a few miles away. Similarly, a boat and RV storage facility in an urban area such as San Francisco will have different rates, offerings, unit types, and occupancy data than a facility in Oakland.
So much of self-storage feasibility depends on reading the needs of an area correctly. Cap rates reflect those variants.