Have you looked at the street rates for your self-storage business lately? I’m referring to the price a customer would pay today if he walked in off the street to rent a unit.
When my company completes a facility valuation for an owner, we always ask when he last adjusted his street rates. It’s surprising how many say they don’t remember or that it’s been a year or longer. Some have never adjusted those rates. That’s just crazy! You certainly aren’t paying the same price for gas or milk that you did last year or even last month. The price of commodities changes constantly based on supply and demand. You should be doing the same with your unit pricing.
Adjusting street rates is one of the most important tasks of every facility operator. It’s the No. 1 driver of long-term revenue growth for a storage property. You should review and adjust these rates at least monthly. Every other week or even weekly would be better.
To get started, look at the pricing and occupancy of your units by size and type. As the occupancy goes up or down for each, so should the street rate. Adjusting the rates accordingly will result in greater income and facility value. Yes, lowering rates will increase revenue! Let’s go into more detail.
Lowering Street Rates
Many self-storage owners look solely at overall occupancy as their measure of performance, but by doing so, they’re missing potential revenue. When your facility has been at or near full occupancy for months or even years, you may think you’re doing something right. But if you’re highly occupied at prices below the current market, you’re losing out. Even with units at 50 percent and 100 percent occupancy, you have great opportunities to increase income.
Let’s say you have 30 5-by-10 units with a street rate of $50 per month. Only half are occupied. You look at your competitors’ pricing and learn that your rate is about average. What should you do? Disregard competitor pricing and lower the street rate on that unit size. Why? If those 15 units stay vacant, they’re bringing in zero dollars; but if you can lower the rate by $5 or $10 and fill them, you’ll increase occupancy and revenue. Take a look:
I’m not saying the “magic number” to lower your rates is $5 or $10. Maybe it’s only $2 or $3 in your market. It’ll take some trial and error. Tinker around and see at what rate your occupancy starts climbing. Fill those vacant units, and then you get your new customers into your tenant-increase schedule. This tactic will continue to maximize revenue.
Raising Street Rates
Now, let’s talk about your units that are 100 percent occupied or close to it. How should you adjust your street rates for these? It may be counterintuitive, but you don’t want any unit size or type to stay at 100 percent occupancy for long. The better number to aim for to maximize revenue growth is around 94 percent.
Consider, for example, the always popular 10-by-10 unit. Let’s say you have 100 of these and the street rate is $100 per month. You can raise the rate to $120, which might lower your occupancy but can still increase revenue. Take a look:
By raising the rates on fully occupied units, you’re bound to have some move-outs; however, these newly vacated units will have the higher rate for any new customer moving in. This creates churn, and some churn is a good thing. Once you find that sweet spot for the street rate in your market that keeps your occupancy in the mid-90s, you’ll continue to create additional supply for new tenants while growing revenue. In the example above, that extra $15,360 in annual income also increases the property value by $192,000, assuming an 8 percent capitalization rate. Raising street rates doesn’t sound so bad now, does it?
Rates Go Both Ways, Revenue and Value Go Up
Managing your street rates is one of the easiest ways to drive revenue at your self-storage business. In fact, adjusting them up or down based on supply and demand for each unit size and type is critical to your success. Be active and set a plan to regularly review and fine-tune your street pricing, and you’ll see increases in income and facility value.
As a brokerage advisor for Investment Real Estate LLC (IRE), Justin Quinto is responsible for listings, sales, buyer representation, due diligence, financial analysis and feasibility studies in Connecticut, Massachusetts and New York. IRE brokers the sale of self-storage facilities in the Northeast and mid-Atlantic. For more information, call 860.936.1117; e-mail firstname.lastname@example.org; visit www.irellc.com.