For this article, a “C of O” (Certificate of Occupancy) offering is defined as a self-storage property which has been completely constructed and received its C of O. This should not be confused with what is referred to as a “rendering” offering – where only a rendering of the property exists and the seller agrees to complete construction and obtain the C of O prior to closing. The important distinction between these two offerings is that buyers can touch, feel and walk the C of O offering before they enter into a contract and a rendering property requires that the buyer assume all risk associated with construction.
Lease-up is the biggest risk factor when evaluating a potential C of O acquisition. As such, it is essential to carefully project appropriate rental rates for the property. In making these projections, there are several factors to consider.
Self storage rental rates can fluctuate significantly based on seasonality, with warm weather months receiving a premium over cold weather months. It is important to be aware of the time of year that a rent study was conducted and project rental rates accordingly. If data is available, rent studies conducted throughout the year should be considered.
Recently constructed properties which are leasing-up typically reduce their rental rates to increase lease-up velocity. As a result, when determining market rental rates, investors may want to place primary emphasis on properties which are at or near stabilized occupancy. However, in certain markets with significant new construction, stabilized properties may be experiencing “rent roll down” whereby asking rental rates are reduced below normal levels in order for the property to remain competitive. When rent roll down occurs, the existing customers are paying a higher rental rate than what is being offered to new customers. Investors evaluating C of O opportunities must understand the impact of new construction on market rental rates.
It should not necessarily be assumed that the newest property in the market should receive the highest rates among its competitors. Physical characteristics such as location, accessibility, visibility and construction quality do impact rental rates. However, the degree to which these factors impact rates can be difficult to quantify.
Utilizing the correct rental rates for a C of O property is more of an art and less of a science. With proper due diligence, an investor will be able to quantify to a better degree of value.
It is also important to be aware of any new competition as this could exert downward pressure on market rental rates and prolong lease up. One of the most important aspects is understanding the balance of how lease up properties affect the stabilized rental rates.