An extension shares the store's staff, office and systems, so its margin is far higher than the store's. Costing it at the average ratio understates the value it creates by more than two fifths.
Value a self-storage expansion on its incremental NOI, because the new units share the existing store's staff, office, software and management. On an illustrative 20,000 sq ft extension costing £2,576,000, incremental NOI of £268,010 gives a 10.4 per cent yield on cost and, capitalised at 6.25 per cent, £1,712,160 of value created before lease-up, or £1,438,740 after it. Applying the store's average 38 per cent cost ratio instead would understate that value by £746,720.
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 →
Expansions are the cheapest growth in self-storage when the land is already owned: a full store on a site with room for another building, or a single-storey drive-up block beside a multi-storey one. The appraisal is usually done twice, once by the operator on incremental economics and once by a lender or valuer on whole-store ratios, and the two answers differ by a lot. The question is which one is right, and when.
| Input | Value |
|---|---|
| Existing store, net rentable sq ft, occupancy | 60,000 at 93% |
| Extension, gross sq ft and net rentable sq ft | 22,500 and 20,000 (88.9%) |
| Build, including units, doors, security, externals, per net sq ft | 115.00 |
| Fees and contingency | 12% |
| Rent per occupied sq ft a year, stabilised occupancy of new space | 20.00, 85% |
| Ancillary income (insurance, retail), of rent | 5% |
| Business rates and insurance on new area, per sq ft | 2.80 and 0.40 |
| Variable costs: marketing, utilities, repairs, card fees, of revenue | 7% |
| Whole-store operating cost ratio, for comparison | 38% |
| Cap rate | 6.25% |
| Occupancy of the new space in years 1 and 2 | 35% and 65% |
The land is owned and the planning consent is assumed in hand, so neither appears in the cost. That is the advantage of an expansion, and also the reason to be careful: if the land could be sold or let, its value is a real cost of using it.
Build: 20,000 × £115.00 = £2,300,000. Fees and contingency at 12 per cent: £276,000.
Development cost = £2,576,000, or £128.80 per net rentable sq ft.
Rent: 20,000 × 85% × £20.00 = £340,000. Ancillary: £17,000. Revenue: £357,000.
Business rates £56,000, insurance £8,000, variable costs 7% × £357,000 = £24,990. Incremental costs: £88,990, or 24.9 per cent of revenue.
Incremental NOI = £357,000 − £88,990 = £268,010.
Yield on cost = £268,010 ÷ £2,576,000 = 10.4%. In Excel: =NOI/Cost, with NOI built line by line, not as revenue times a margin.
What is missing from the cost lines is the point. No store manager, no extra assistant, no office, no website, no management software licence, no head-office overhead. They are already paid for by the existing 60,000 sq ft, and the extension does not increase them. If the store is run by a third-party manager on a percentage of revenue, that fee is incremental and belongs in the variable line.
Value of the incremental NOI: £268,010 ÷ 6.25% = £4,288,160.
Value created at stabilisation: £4,288,160 − £2,576,000 = £1,712,160. The extension is worth 1.66 times its cost, a spread of 415 basis points between yield on cost and cap rate.
Lease-up: NOI of £72,710 in year 1 and £189,890 in year 2, against £268,010 stabilised. Shortfall: £195,300 + £78,120 = £273,420.
Value created after lease-up = £1,438,740. All-in cost £2,849,420, yield on all-in cost 9.4 per cent.
The lease-up shortfall is undiscounted and treated as a cost, as in a development appraisal. Because the extension carries so little fixed cost, it earns positive NOI from the first year. A new-build store, carrying its own staff, office and overhead at 35 per cent occupancy, would typically still be running at a loss; what a new build costs is set out in self-storage construction cost per sq ft.
| Measure | Incremental costs | Store-average 38% |
|---|---|---|
| NOI at stabilisation | 268,010 | 221,340 |
| Yield on cost | 10.4% | 8.6% |
| Value at 6.25% | 4,288,160 | 3,541,440 |
| Value created, before lease-up | 1,712,160 | 965,440 |
| Break-even occupancy of the new space | 57.6% | 61.8% |
The average ratio understates value created by £746,720, 44 per cent. It is the right view only if the expansion makes the store big enough to need a second full-time person, or if a buyer of the whole store will underwrite it at average ratios regardless. A valuer will often do the latter, which is why the operator's number and the bank's number differ.
| Occupancy of new space | £18.00 per sq ft | £20.00 per sq ft | £22.00 per sq ft |
|---|---|---|---|
| 70% | 7.1% / 337,248 | 8.1% / 774,720 | 9.2% / 1,212,192 |
| 80% | 8.4% / 899,712 | 9.6% / 1,399,680 | 10.9% / 1,899,648 |
| 85% | 9.1% / 1,180,944 | 10.4% / 1,712,160 | 11.7% / 2,243,376 |
| 90% | 9.8% / 1,462,176 | 11.2% / 2,024,640 | 12.5% / 2,587,104 |
Every cell creates value, which is typical of expansions on owned land. The risk is not in this table but in the assumption behind it: that the new space finds new customers.
Beyond the average cost ratio, the mistake is assuming the existing store keeps its occupancy. At 93 per cent the store is turning customers away in some unit sizes, and an extension that adds those sizes captures demand that already exists. Combined, the store would run at 91.0 per cent on 80,000 sq ft. A store at 80 per cent is different: new units mostly give existing customers somewhere else to move, and the incremental NOI is the new space's NOI less what the old space loses. Read the unit-mix occupancy before the total: an expansion should add the sizes that are full, not more of the sizes that are not. The cap rate and the rest of the store's valuation are worked in how to value a self-storage facility.
Cost an expansion line by line on what it adds: here £268,010 of NOI on £2,576,000, a 10.4 per cent yield on cost and £1,438,740 of value after lease-up. The store-average ratio is a lender's shortcut, not the operator's economics. The book's cohort model, from which occupancy, rent roll and value are built, is in the free workbook for this case.
It has to clear the cap rate the extended store will be valued at by a margin that pays for lease-up and risk. In the illustrative case a 10.4 per cent yield on cost against a 6.25 per cent cap rate is a spread of 415 basis points, and the completed extension is worth 1.66 times what it cost. Expansions on owned land usually clear that bar more easily than new builds because there is no land cost and little fixed cost.
Business rates and insurance on the new area, plus costs that scale with revenue: marketing, utilities, repairs, card fees and any percentage management fee. Staff, office, software and overhead normally are not. In the illustrative extension the incremental costs are £88,990, 24.9 per cent of revenue, against 38 per cent for the store as a whole.
Where the capitalised incremental NOI equals the development cost. In the illustrative case, at £20.00 per sq ft and a 6.25 per cent cap rate, that is 57.6 per cent occupancy of the new space on incremental costs, or 61.8 per cent if the store-average cost ratio is applied, before counting the lease-up shortfall.
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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