In the self-storage industry, some owners invest for the long term while others have a much shorter exit strategy. There’s no one-size-fits-all formula to success; however, there are some principles all owners can follow to generate strong yields and, therefore, higher facility values. To keep your business financially sound, pay attention to the following key performance indicators.
Site Analysis and Planning
I’m starting with the planning process because it can save time and money on the front end, if skillfully executed. As you conduct a thorough market analysis, project prospective rents, assemble a dynamic unit-mix table, roll out your pro forma and gear to lease-up, strive to bridge any gaps between acquisition, development and operation. What looks good on paper may not work in reality, and reforming your analysis based on the latest trends is tricky. If you’re not soberly approaching this process, it can negatively impact your stabilization timeline.
For example, think about unit mix and rental rates. These play a huge role in potential income for a self-storage property, and yet they’re easily overlooked. If you build units that yield a higher price per square foot rather than those that are truly in demand, you’ve glossed over the due diligence. We all like streamlined product roll-outs, but again, self-storage isn’t a cookie-cutter business.
Success comes through a market-specific approach that supports present and future demand, especially if you plan to penetrate a new market. My point is economic needs should drive innovation, not the other way around.
Proper revenue management allows you to increase your price per square foot. It’s a quintessential step resulting in cash-flow growth, and any decent operation uses this framework. There’s only so much net leasable square footage on your land, so as you absorb more occupancy, keep a finger on the pulse of your market. A revenue-management system is good to have in place, but it requires cunning adaptation based on dynamic variables:
- Street rates
- Existing tenant rates
- Unit occupancy
- Average length of stay
- Market comparables
- Residential vs. commercial renters
- Tenants who rent multiple units
These give bearing on the rates new renters receive, and how often you push up rates for existing tenants. It’s also important to temper your algorithm with a human touch.
The idea is to shrink your “loss to lease” (occupied rate variance) while capitalizing on your actual occupied unit rates. This process eases your actual occupied closer to your gross occupied. Once your actual exceeds your gross, you’ll achieve a “gain to lease” rather than a “loss to lease.”
Essentially, you’re doing a dance, swaying back and forth between recalibrating gross potential income through increased market rents and closing in on your gross occupied through proper management of existing-tenant rents. This leads to fractional gains in your net income as well as long-term increases that impact total revenue.
Your facility value per square foot is also affected by your conversion rate. Measuring your conversion ratios is helpful in that it reveals how well you’re performing with in-store sales. If you’re trying to increase your actual rents, it’s crucial that managers close deals. This is where a staff assessment comes into play. Remember, we’re discussing undercurrents that influence asset value.
Having a good product is critical, but investing in those who “grind it out” demands equal if not greater attention. As an owner, you should encourage organizational balance by placing emphasis on people over product.
There are few businesses in which success or failure is so intricately intertwined with the site manager’s skills, personality, customer-service attitude and common sense as self-storage. Your staff needs professional skillsets that directly contribute to the successful management of the facility. Cultivating your team is an ongoing effort that requires energy, training and much mentoring. It must be intentional and strategic. Your investment here will never come back empty! Once you know you have a solid, sales-oriented team in place, it’ll be easier to focus on financials as you scale up.
In real estate, robust returns are always linked to excellent stewardship. It’s the cornerstone that drives growth. There’s more to facility valuation than simply dividing net operating income (NOI) by the capitalization rate. We’re seeing a considerable volume of new supply in self-storage, and it’s imperative to remain competitive in the marketplace by sufficiently maintaining your properties. Of course, the emphasis here would be more on stabilized assets, but facility condition is important. It sounds basic, but at the end of the day, it’ll help you negotiate from higher ground.
Take a good look at your repair and maintenance budget for the year. Are you allocating the cost? This can be indicative of how fit your facility is (or isn’t). Don’t let this fee scare you just because it’s above the NOI line. Skimping on routine repairs because you didn’t work it into your projections is short-term thinking. I’d argue this is true even in a rural or tertiary market, even in the face of lower margins on your debt-service coverage spectrum.
Make the choice that’ll lead to long-term profit. You can feel the pinch now by soberly anticipating this operating expense or suffer on down the road. The last thing you want are excessive capital deductions from undone projects, or to be dinged on deferred maintenance due to responsibilities that lingered at the point of liquidation.
I want close with brand awareness. After all the blood, sweat and tears you put into acquiring or building a self-storage facility, the best way to position yourself for growth is to establish a connection with your target audience and make them aware of your services and brand. Modern technology can be a powerful vehicle to help you accomplish that. Diversify your communication platforms and jumpstart traffic generation with aggressive online campaigns coupled with community-driven, grassroots outreach.
One to 3 percent of your total revenue should be devoted to advertising. It takes money to make money. Investing in marketing will always result in your property becoming stronger financially because it drives action on the leasing front!
The operational strategy for each self-storage property will be different, based on the market. Whether you’re dealing with a stabilized asset or opening a new facility, your tactics should have an ebb and flow based on seasonality and location. There’s a time and place for everything, and it takes a team effort to see it all come to fruition. Hopefully, these guiding principles will help keep your asset value strong and attractive!
Cody Reynolds is regional director of operations for The Sterling Group, an Indiana-based real estate investment firm that specializes in self-storage and multi-family housing properties. The family-owned company owns and manages both property types, with a concentration in the Midwest and Southeast. Cody got his start in self-storage in 2006 and has held resident, area and district-manager positions. To reach him, call 469.955.2837; e-mail firstname.lastname@example.org; visit www.ministoragedepot.com.