The Ten Commandments were chiseled into stone tablets, but your rental rates should not be. Many well-intentioned owners and managers are leaving a great deal of revenue on the table as a result of rental rates that appear to be “chiseled in stone.” This causes distress to the overall self-storage market.
Self-storage is a supply-and-demand business. In many markets, occupancies are higher than they have been in years, and many operators are doing a great job of managing that demand by maximizing their rates and balancing their inventory. Others, however, are reluctant to increase rates, despite running at or near 100 percent occupancy. A recent study of several markets across the country showed that despite high demand, rates are still lagging behind at many sites.
In today’s competitive environment, even incremental increases in revenue through effective rate management can have a dramatic effect on your facility value. For every dollar of rate increase, you improve your facility value by at least $120 ($1 multiplied by 12 months at a 10 percent cap rate). Given the ebb and flow of business cycles, we all need to maximize revenue when we can. Following are some things to think about when it comes to rental-rate management.
Do you manage your rates based on the competition? When you consider the development of a new site or your site is in lease-up, your competitors’ rates are important. You have to know what the market can bear, especially when you’re in a race to fill your site. Once your facility is stabilized, however, its rates should be minimally impacted by competitors.
Quite simply, if you have few or no units of a particular size to rent, you should raise the rate, because the demand has exceeded the supply. It doesn’t matter what your competitor charges for that size. You cannot be completely oblivious to the market, but you should base rates on personal inventory more so than competition. We recently found a huge disparity in rates between two facilities in St. Petersburg, Fla.:
- Site A, with a 96 percent occupancy, rents 10-by-10s for $125 and 10-by-20s for $199. It only has one or two of each size available.
- Site B, which is only a quarter-mile from site A, rents 10-by-10s for $80 and 10-by-20s for $110. It is 100 percent occupied.
We couldn’t rent a unit at Site B for any price, yet the facility still lists its rates 80 percent below the closest competitor. Rates should be managed per unit size, not site occupancy. You never want to be in a position where you don’t have a unit to rent to a new tenant.
Take a page from the motel-management handbook: If you only have one or two of a popular size unit to rent, increase your rate. If your 10-by-10 drive-up units are full but you have vacancies in your 10-by-10 climate-controlled units, raise the rate on your driveups instead of lowering the rate on the others. It’s simple: If you are 95 percent or more occupied on a particular size, your rate is too low.
Finally, flexibility is key. Don’t print your prices on your business cards or anywhere else. Once you’re committed to the rates, it’s difficult to change them “on the fly” as supply and demand changes.
Do you review your rental rates at least once per month? Do you have an evaluation system in place? People generally consider “micromanage” to be a dirty word, but when it comes to rates, micromanagement is a necessity. Across all markets, the self-storage operators with established revenue-management processes have higher rates and revenue than those without them.
Develop a system for managing rates or seek outside help. After many years of using a manual, twice-per-year system, one of the larger self-storage operators now has an automatic system that reviews rates twice a month. As a result, its rates and revenues are significantly higher. There are even software programs that offer revenue-management assistance. Work with your consultant to determine which product will work best for your situation.
Increases for Existing Tenants
An effective revenue-management process also includes regular, systematic rate increases for existing tenants. When (not if) you decide to increase rates depends on various factors, but you should introduce at least modest increases annually. Your timing and the amount of the increase, as well as its success, will depend on current occupancy levels, street-rate increases, market factors and the ability of your manager to deal well with customers.
Believe it or not, there are still self-storage operators offering move-in discounts on every unit size, despite occupancy levels. Why would you offer 50 percent off the first month’s rent on your last available 10-by-10, or offer to match a lower rate on your only vacant 10-by-20? Move-in incentives should only be used during lease-up or to help fill a high-vacancy unit size.
Your ability to “sell” storage greatly influences your confidence to increase rents. Owners’ reluctance to raise rates is often related to fear of upsetting customers or a resignation that their managers cannot sell the higher rates and it’s easier to leave things alone. Ensuring managers are well-trained to sell units—instead of hoping they can rent them—is a small investment to make to create greater facility value. An effective sales presentation can overcome rate-related anxiety.
So while it may have been necessary that the Ten Commandments were chiseled into stone, you will be better served to have your rates written in pencil and keep a large eraser close at hand.
Bob Copper is the founder of Self-Storage 101, a provider of do-it-yourself management tools. The company empowers managers and owners to take control of their assets and compete with institutional players at a fraction of the cost. For more information, call 866.269.1311; e-mail firstname.lastname@example.org; visit www.selfstorage101.com. RK Kliebenstein is the president of Coast-To-Coast Storage. He can be reached at 561.638.1851 or via e-mail at email@example.com.