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13 Aug 2020

Dealing With COVID-19 Throughout the Valuation Process

Jeffrey Shouse

Executive Managing Director, National Practices

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:

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Although the potential pool of buyers might be reduced during this “pause” there is still plenty of money in the industry chasing deals due to lack of supply and strong demand. For Class A/B facilities where the implications of COVID-19 appear most temporary, a rent loss adjustment is often more appropriate than an increased cap rate that represents a permanent reduction.

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. Therefore, going forward under the implications of COVID-19, specialized local analysis of market demand will be more important than ever when assessing the risk and appeal of the subject investment. Positive growth rates may still be warranted for Class A facilities with the strongest demand, while inferior facilities may require flat or even negative adjustments in some markets.

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. Multifamily should continue to see demand due to its ability to withstand changes in the economy due to the demand for housing as an essential need. 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.


Thumbnail: Photo by Frank Busch on Unsplash