New supply in the catchment reaches the rent roll through four lines, and most of it arrives after the trailing twelve months have been read.
Price a new competitor as a permanent change to NOI, then capitalise it. On an illustrative 50,000 sq ft store earning £905,532, a new store nearby that takes 6.0 points of occupancy, 3.0 per cent off the average rent and adds £15,000 of marketing cuts NOI by £145,697, or 16.1 per cent, and value by £2,182,730 at a 6.25 per cent cap rate. Most of it arrives slowly: a buyer who values on trailing income nine months after the opening sees less than a quarter of the damage.
Worked in full in Self-Storage Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Self-storage has no leases to hold customers in place, so new supply in the catchment shows up in the rent roll within months. The question an owner, a lender or a buyer has to answer is not whether the store loses something, but how much, through which lines, and how quickly.
The starting point is the illustrative store valued in how to value a self-storage facility. The competitor case is an assumption, set out line by line so it can be argued with.
| Input | Before | After |
|---|---|---|
| Net rentable area, sq ft | 50,000 | 50,000 |
| Occupancy, by area | 87.0% | 81.0% |
| Average in-place rent, per sq ft a year | £30.00 | £29.10 |
| Discounts and bad debt | 4.0% | 5.0% |
| Operating costs | £352,000 | £367,000 |
| Management fee, share of revenue | 6.0% | 6.0% |
| Cap rate / purchaser's costs | 6.25% / 6.8% | 6.25% / 6.8% |
Each line has a reason. Occupancy falls because some of the store's move-ins now go next door. The average rent falls because the operator holds back existing customer rate increases and lets new customers in at a lower street rate. Discounts rise with promotions, and marketing spend rises by £15,000 to defend enquiries. Ancillary income, £85,000 before, is assumed to move with occupancy.
NOI = (area × occupancy × rent × (1 − discounts) + ancillary) × (1 − fee) − operating costs
Value = NOI ÷ cap rate ÷ (1 + purchaser's costs)
Excel: =(NRA*Occ*Rent*(1-Leak)+Anc*Occ/Occ0)*(1-Fee)-Opex, then =NOI/Cap/(1+Costs)
| Line | Before | After | Change |
|---|---|---|---|
| Area let, sq ft | 43,500 | 40,500 | −3,000 |
| Rent billed | 1,305,000 | 1,178,550 | −126,450 |
| Rent collected | 1,252,800 | 1,119,622 | −133,178 |
| Ancillary income | 85,000 | 79,138 | −5,862 |
| Revenue | 1,337,800 | 1,198,760 | −139,040 |
| Management fee | 80,268 | 71,926 | −8,342 |
| Operating costs | 352,000 | 367,000 | 15,000 |
| NOI | 905,532 | 759,835 | −145,697 |
Revenue falls 10.4 per cent, but NOI falls 16.1 per cent, because almost all of the cost base stays where it was. The margin drops from 67.7 to 63.4 per cent. Capitalised, the store goes from £13,566,022 to £11,383,293 net of purchaser's costs, from £271 to £228 per sq ft.
| Cause | NOI lost | Share |
|---|---|---|
| Six points of occupancy | 86,726 | 59.5% |
| Three per cent off the average rent | 32,892 | 22.6% |
| One more point of discounts and bad debt | 11,078 | 7.6% |
| Extra marketing | 15,000 | 10.3% |
| Total | 145,697 | 100.0% |
Each point of occupancy is worth about £216,545 of value here. That is the number to hold up against any plan to defend occupancy with deeper move-in offers: a promotion that saves a point costs less than that only if the customers it brings stay as long as the ones they replace.
The loss does not arrive on the opening day. The new store fills over two or three years, mostly with customers who would have arrived at yours, while your existing customers leave at their usual pace. The table uses a simple illustrative curve that reaches half the fall by month 9 and 90 per cent by month 30; replace it with the lease-up curve you expect for the new store.
| Month | Share of fall | Annualised NOI, £ |
|---|---|---|
| 3 | 20.6% | 875,475 |
| 9 | 50.0% | 832,683 |
| 18 | 75.0% | 796,259 |
| 30 | 90.1% | 774,290 |
| 36 | 93.8% | 768,941 |
The trailing twelve months trap. Nine months after the opening, the trailing twelve months still contain three months from before it and nine months of a fall that is only half done. They show NOI of £872,086, which holds just 23.0 per cent of the eventual drop. Capitalised, that is £13,064,965, or £1,681,672 more than the store is worth once the market has settled.
| Occupancy lost | Rent cut 0% | Rent cut 3% | Rent cut 6% |
|---|---|---|---|
| 3.0 points | −1,051,793 (−7.8%) | −1,557,492 (−11.5%) | −2,063,191 (−15.2%) |
| 6.0 points | −1,695,091 (−12.5%) | −2,182,730 (−16.1%) | −2,670,368 (−19.7%) |
| 9.0 points | −2,338,390 (−17.2%) | −2,807,967 (−20.7%) | −3,277,545 (−24.2%) |
Even the mildest case, three points of occupancy and no rent concession, takes 7.8 per cent off value once the defensive costs are included. The range across the grid is wide, which is the point: the answer depends on the competitor's size, distance and pricing, and those inputs should be measured on the ground, not assumed from a national average.
Turn the competitor into four inputs, occupancy, rent, discounts and costs, compute the settled NOI, and capitalise the difference. In this case a 16.1 per cent fall in NOI costs £2,182,730 of value, and a buyer pricing off trailing income would miss most of it. The free workbook for this case, with the cohort model the book is built on, is on the Self-Storage Real Estate companion page.
It depends on distance, size and the competitor's pricing, and should be measured on the catchment rather than assumed. In the illustrative case a loss of 6.0 points, from 87.0 to 81.0 per cent, accounts for £86,726 of a £145,697 NOI fall. Each point of occupancy is worth about £216,545 of value at a 6.25 per cent cap rate.
Usually two to three years, because the new store fills gradually and existing customers leave at their normal pace. On a curve that reaches half the fall by month 9, about 90.1 per cent of the loss has arrived by month 30. That is why trailing income overstates value for a long time after an opening.
Only if the occupancy saved is worth more than the rent given up. Here a 3.0 per cent cut to the average rent on its own costs £32,892 of NOI a year. If it saves fewer than 2.3 points of occupancy, worth £14,454 of NOI each, it destroys value; the test is the length of stay of the customers it keeps or wins.
This article is one calculation from Self-Storage Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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