Underwriting ECRI recapture in a self-storage submarket where street rates are still falling

Take a 55,000 rentable square foot self-storage facility, 480 units, asking $4.9M. Trailing twelve NOI of $348k prices at 7.1% on the ask, while a broker's pro forma might run to an 8.4% year-three yield built almost entirely on rate growth. Physical occupancy at 91%, economic occupancy at 74%, is a common signature of this kind of upside story. The issue worth examining is composition. If 44% of leases are under 12 months old and priced below street, a broker will present that gap as recapture upside. But when street rates themselves have fallen roughly 6% on comparable units over the past year in that submarket, and a large new facility nearby is still in lease-up offering free months, part of that gap is the market repricing downward, not embedded upside. Rate increase letters sent against a moving target don't capture what the pro forma assumes. The second issue is expenses. A T12 showing 32% of EGI is worth stress testing against two lines in particular: property taxes, which will often reassess higher on the sale price in many states, and insurance, where current market quotes on comparable facilities frequently run above what an older T12 reflects. Fixing just those two lines can push the expense ratio toward 38% before management fee, taking NOI down meaningfully and the effective cap rate down with it. On modeling churn against ECRI increases, a useful working assumption is that some measurable share of tenants move out for every meaningful rate increase, and that churn cost, re-marketing, downtime, concessions to backfill, belongs in the model rather than being ignored in favor of the gross increase alone.