The Most Important Variable

Written by: Warner Russell Posted: 6/18/2018
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Properly underwriting a self storage development opportunity requires answers to a number of key questions: Is the proposed location a good self storage site from a demographic perspective? How much competition is the facility likely to face? Will customers feel safe? How visible will the facility be? Is there a reputable third-party manager in the market? The list goes on.

While all of the foregoing questions and their answers are important and relate to one another, one underwriting variable stands out above all others: What is the projected stabilized net operating income of the proposed project? The bottom line is the most important line for developers, investors, lenders and potential buyers and the only way to determine a future bottom line is to realistically underwrite a potential rental rate.

In the past three years, Jernigan Capital has worked on building an extremely comprehensive database of competitor data for facilities across the country. Because our company has a substantial equity interest in each of the facilities we capitalize, we require realism and conservatism in rate assumptions. To ensure we are being both realistic and appropriately conservative, we use multiple data providers to track rental rates and keep a running history of rates so we can track trends in markets and micro markets where we consider financing projects. Rental rates change daily, so tracking and evaluating trends will help us know where rates are likely to be four or five years later when the planned project is built and fully-leased.

Moreover, projects delivered earlier in this development cycle are beginning to establish track records that can be used as a measuring stick for projects currently being planned. Particularly in markets where significant deliveries have occurred, rental rates may have softened and those trends could be instructive for other markets facing similar levels of new supply at this stage of the cycle. These trends should be analyzed as well and used as a tool for good decision making on whether a submarket can absorb another facility. If a developer too aggressively underwrites its rates in the face of new supply such that one too many facilities is built in a submarket, it can ruin the project for the developer as well as negatively impact the other facilities around it, casting a cloud over that particular self storage market.

We would encourage anyone who is looking to develop a new facility, especially now that the development cycle is in its later stages, to take a similar approach. Contact providers like StorTrack and Yardi Matrix, etc. and build your own databases to ensure the financial feasibility of your underwriting. We often encourage developers to consider a third-party feasibility study up front. The amount and availability of data makes this cycle very different from past cycles. Use it to your advantage.

If you have questions about how Jernigan Capital is tracking rental rate data, please let us know. We are still optimistic that the end of the development cycle will produce a soft landing in most markets and that there will always be demand for new facilities in certain micro markets around the United States. We are excited to continue financing the best projects in those places and look forward to seeing how the lease-up season treats the sector as a whole.

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