The self-storage industry has seen significant growth in recent years and is projected to expand at a CAGR (compound annual growth rate) of 7.53% between 2023 and 2028.  With the impending rise in purchase transactions, understanding the value of a self-storage business is now more crucial than ever for both buyers and sellers.
Let’s dive into self-storage valuation and discuss the different methods used to determine the value of a self-storage business.
Self-storage valuation involves figuring out how much a self-storage facility is worth financially. This is significant for several reasons, such as when an owner is considering putting up their self-storage business for sale or when investors are assessing a self-storage facility's potential profitability. Several methods are used to determine self-storage valuation.  These include:
1. The Cost Basis Approach
The cost basis approach compares how much it would cost to replace the facility in the local market. This approach considers variables like the cost of the land and construction, depreciation, and obsolescence.
It helps determine a facility's current market value, but it might not be the best predictor of its future potential. The cost basis method primarily focuses on the current costs associated with replacing the facility without considering factors like market swings, shifts in demand, or potential growth opportunities in the area.
In addition, this method might not accurately reflect the value of unique or specialized properties with limited comparables, as the replacement costs could differ significantly from the actual market value.
2. The Income Capitalization Method
The income capitalization method is another commonly used technique to value a self-storage facility. This approach accounts for all revenue streams coming from the facility, including rental income and other sources of income.
It then involves calculating the property value by dividing the net operating income (NOI) by the capitalization rate (cap rate). This strategy reflects the facility's revenue stream and serves as a crucial predictor of the potential profitability of the enterprise.
3. Direct Capitalization
Direct capitalization is similar to income capitalization, but it uses the discounted cash flow (DCF) analysis to value the property. This method factors in the facility's future income streams and growth potential, making it a more comprehensive valuation technique.
Moreover, this approach helps identify investment opportunities and understand long-term financial implications, making it a valuable tool for property management and investment analysis when selling a self-storage business.