Operating expenses have become a significant challenge in the underwriting process for self-storage facilities in Montana. Over the years, property taxes have been a focal point, but recently, insurance premiums have also experienced substantial increases. Here are some key insights and strategies to help you navigate these challenges and make informed investment decisions.
Rising Operating Expenses: Property Taxes and Insurance Premiums
For a long time, property taxes were the primary concern for self-storage facility operators in Montana. Preparing for these increases was essential, especially when a facility changed ownership. However, the landscape has shifted, and now insurance premiums are experiencing dramatic hikes, in some cases doubling, tripling, or even quadrupling. These sharp increases have made underwriting these expenses increasingly difficult.
One wise approach, and one that we at SterlingCRE Advisors recommend, is to proactively engage with your insurance provider or the existing provider at the facility you are looking to acquire. Discuss what the premium might be if the facility were to turn over and begin to underwrite substantial increases in that insurance premium if needed.
The reasons behind these increases are multifaceted. Discussions among the industry indicate there is a legacy catch-up where insurance companies are rectifying years of underpricing by implementing significant premium hikes in a short period. Additionally, the replacement costs for facilities have risen considerably due to the increased prices of materials like steel. These factors can negatively impact your Net Operating Income (NOI) projections if you are not adequately prepared for these insurance cost increases.
Strategic Guidance for Underwriting
Given the challenging landscape of operating expenses, it is crucial to adopt a proactive and informed approach to underwriting. Anticipating and accounting for potential increases in operating expenses will help ensure your financial models remain accurate and realistic. This strategic foresight is particularly important when acquiring new facilities or developing new ones.
To work through these complexities, it is beneficial to partner with experts who have a deep understanding of the market dynamics. At SterlingCRE Advisors, we can assist you in evaluating these underwriting trends and provide tailored market data specific to your submarket. Our goal is to help you make the most informed decisions possible, ensuring the long-term success and profitability of your investments.
