How Site Layout and Unit Mix Affect a Self-Storage Facility's Profit: Understanding and Managing These Critical Components
|Copyright 2014 by Virgo Publishing.|
|By: Mike Gillikin|
|Posted on: 07/06/2010|
The success of any business is a matter of economics. Simply put, it comes down to income vs. expenses. As long as there’s more money coming in than going out, an owner can stay in business and prosper.
Self-storage adheres to this same formula, but there are nuances to our industry that are essential to success. Like any other real estate developer, the self-storage owner is concerned with financing, land availability and acquisition, construction and materials, customer profiling, marketing, and competition.
But the successful owner is also aware of every opportunity to be profitable. This article takes a look at how site layout and unit mix can affect the successful lease-up a new self-storage facility and, ultimately, an operator’s revenue stream.
Once a self-storage operator has appropriately analyzed his market and optimally located his facility, he must determine the most efficient use of land in terms of site layout. The proper positioning of buildings on the site can be critical to an owner’s success. Poor planning will result in fewer leasable units.
In addition, the proper mix of unit sizes is one of the most important factors in determining whether a facility will prosper or languish. After all, if an owner knows who his customers are and understands their storage needs, his occupancy rates will stay high under normal market conditions.
That said, unit mix is often one those areas that can stand improvement. No one has a crystal ball to predict the perfect mix, particularly at a new facility. If an owner’s occupancy rate is good, he may think he has the problem solved. But there’s a more finite opportunity to increase profitability, particularly when the owner is adding on to an existing facility, because there’s already knowledge of market needs and limitations, thanks to the original feasibility analysis.
When determining the unit mix for an addition, there are three factors to consider:
Rent Per Square Foot vs. Occupancy
Occupancy rate and total square footage are important, but what good are they if rent per square foot is too low? When discussing an addition with an owner, there’s often a good deal of confidence placed in the facility manager regarding unit-mix decisions.
Quite often the owner will ask the manager, “What do you think we need to build?” Of course, managers welcome this question because their bonuses and incentives are sometimes tied directly to occupancy rates, and higher occupancy tends to bring praise from owners.
There’s no question occupancy rates are important, but there may be something equally critical missing from the equation. Wouldn’t the owner be more profitable if he could increase the number of units and earn a higher rent per square foot? Managers often suggest adding larger unit sizes such as 10-by-20s, 10-by-25s and 10-by30s, concluding that these units get a higher rent and are, therefore, more profitable. That’s not necessarily the case.
Managers too often make occupancy rates their first priority since they tends to be the benchmark by which most successful facilities are judged. But just because a facility is 100 percent full doesn’t mean it’s as profitable as it should be. While measuring occupancy is a good formula, there are other ways to determine long-term success.
If prospective tenants for small units are being turned away in favor of those requesting larger ones, the manager not only loses rent, he loses the higher price per square foot the renter of the smaller unit would have paid.
If the manager has done his homework, understands the unit mix needed in his market (demand) and has those units available (supply), the formula is working. But by decreasing unit sizes, the manager or owner can increase rental income per square foot and, as a result, net operating income (NOI).
Here’s another advantage of having smaller units: Let’s say a customer requests a 10-by-20 but there are none available. If the manager has smaller units in the inventory, he can offer the customer two 10-by-10s for the same price.
It’s true some markets may not need the smaller units right away, but the difference in the rent per square foot may make up for the temporary lower occupancy rate in the short term. Including smaller units in the mix isn’t intended to negate conventional unit-mix planning; it should be viewed as another method of increasing NOI in the long term.
In the final anaysis, a good unit mix should take into consideration the needs of the market, but also maximize facility revenue. In looking at the bigger picture, there are several factors that impact success in the self-storage business. Unit mix is just one consideration.
After all, the ability of any self-storage facility to experience sustained growth and profitability should be the goal of every manager, owner and investor. Doesn’t it make sense to use every tool at your disposal?