By Magen Smith
When most self-storage operators think of occupancy rates, they immediately focus on unit occupancy. To truly run a storage business well, however, you also need to understand economic occupancy. Using these metrics to drive your rental-rate pricing—as well as key data derived from your management-software reports—is a great way to make more money.
To clearly understand unit occupancy, let’s use some very easy numbers. Imagine you only have 10 storage units. If you rent three units, your unit occupancy is 30 percent. If you rent eight units, your unit occupancy is 80 percent. This is true no matter how much you charge for those units.
Some operators work hard to get their unit occupancy to a “brag-worthy” level. They’ll offer the first month free or use other discounts or incentives just to get people in the door. They think if they can convince prospects to move in, unit occupancy will increase and tenants will stay for years. Sometimes this is true, but not always. Giving discounts to acquire a move-in can often lead to increased collections and auctions. While that $1 move-in special will increase your unit occupancy, it does nothing for your economic occupancy.
Economic occupancy offers major insight to your facility’s health. While you can improve your unit-occupancy rate with specials and discounts, your economic occupancy always shows the truth. Let’s see how it works.
Every self-storage facility has a gross potential rate. If you have 10 units that rent for $100 each per month, your gross potential rate is $1,000 a month (10 units multiplied by $100). Now let’s assume you rented your 10 units the following way:
- Five units @ $100 = $500 per month
- Two units @ $50 = $100 per month
So, you have seven of your 10 units rented, making your unit occupancy 70 percent. If you only ever looked at unit occupancy, you’d think the business was doing well. However, I guarantee your next thought would be, “Where’s all the money?” Unit occupancy is a vanity number. The only thing it tells you is how many leases are signed. It doesn’t tell you how much money to expect each month.
Economic occupancy is the actual occupied divided by gross potential. In the above example, you’re collecting $600 per month instead of the $1,000 you’d be collecting if every unit was rented at the full $100 rate. Six hundred divided by 1,000 is .60. Your economic occupancy is 60 percent.
Here’s a real-life scenario: A facility had a physical unit occupancy of more than 90 percent, but its economic occupancy hovered around 50 percent. When the owner looked at the reports, she thought everything was fine; but she was looking at the wrong number (unit occupancy). After a while, she realized her manager was stealing by giving free storage in exchange for personal benefits.
Following a few years of really hard work, the owner’s unit and economic occupancy are at 75 percent. Her unit occupancy is down from when the manager was in charge, but her economic occupancy is up. She’s making more money with fewer tenants and headaches. The moral of the story is: When reviewing your occupancy rates, look at both unit occupancy and economic occupancy.
So where do you find all this data? Your management software offers several reports to help you crunch numbers and look for trends. One cautionary note: Make sure your program is reflecting the correct information. Occupancy rates are based on total units in the system. This number shouldn’t change unless you literally add or remove a unit to or from your building. When you sit down to review your reports, make sure your total unit number stays the same each month.
Economic occupancy is based off your rental rates. When setting your standard rates, each unit size should have the same rate. If you give tenants different rates, use the tenant-rate field in your software to adjust what they should pay. This is the only way your reports will reflect accurate gross-potential rates, variance rates and pretty much everything else.
In the major management systems, the occupancy-statistics report pulls data based on the rate you assign to each unit, so this is a quick way to know if your standard rates are correct. If you have 25 10-by-10 units listed on the occupancy-statistics report for all different prices, you’ll have errors in your system.
A valuable report to review is the management-history report. This is a great way to look at trends over the past year to see what’s going on with your facility. You can view customer-payment trends to see if the number of cash payments changed significantly, which may signal theft or mismanagement of funds. This report will also show the number of units that were occupied, vacant and unrentable for the past year, with activity right underneath. It shows all your move-ins, move-outs and net numbers.
If you’re considering a rate change, this report will not only show whether you have enough activity to justify it, it’ll highlight the months in which you’re busy or slow. Keep in mind most storage facilities peak in May and August and have a dip from October through January. Look at your history to see if you’re on par with the industry. You can also look at your occupied percentages by units and area. You may have rented only two units, but if they were larger ones, your area will spike and revenue will increase.
Also examine the rate-analysis section of the management-history report. This is a fantastic place to see trends in the business and help you plan pricing. You can review:
- Gross-potential rate
- Number of complimentary, occupied, unrentable and vacant units
- Occupied rate variance
- Effective rate after concessions
- Economic occupancy
Ideally, you want your gross-occupied and actual-occupied rates to be as close as possible. Any difference will show up as an occupied rate variance. Review your reports weekly to ensure you understand what’s happening at your property.
Now you’re armed with the knowledge and information necessary to better run your business. If you need to make a deal to get a unit rented, that’s OK, as long as you understand how that deal is going to affect your rates and reports.
Magen Smith is a former self-storage manager turned certified public accountant (CPA). Her company, Magen Smith CPA LLC, helps storage operators understand the financial side of their business. Services include monthly financial management, bill-pay functions, revenue management and strategy. For more information, e-mail [email protected]; visit www.selfstoragecpa.com.