All too often, I hear self-storage operators boasting about how their facilities are fully occupied with a waiting list. Though they believe they’re running their properties efficiently, they often admit that they haven’t consistently raised rates and aren’t capturing as much income as they could.
The fact is, being fully occupied should never be your end goal. Savvy investors and operators already know this. It’s why the industry’s real estate investment trusts (REITs) aim to keep their occupancy between 93% and 95%, which allows them to push rates higher for vacant units. Their end goal isn’t to have the most occupied facility in the market; it’s to have the most valuable property.
More revenue will always result in a higher net operating income and, therefore, facility value. But before you start jacking up your rates, it’s essential to understand your self-storage market. There are three key factors you must examine: industry demand, consumer income and competitor pricing.
Most self-storage investors use square feet per capita within a three- or five-mile radius to gauge the demand in their market. If the population within a three-mile radius of your facility is less than 50,000, stretch to five miles. The national average is roughly 8 square feet.
In most situations, not including dense urban markets like Chicago or New York City, 8 square feet of self-storage per capita is considered a “supplied” market, meaning the demand has been met. Most developers wouldn’t build in a market that already has this much storage.
In contrast, if demand is less than 8 square feet per capita, the market is undersupplied and can potentially support new facilities. This also indicates an opportunity for existing operators to raise rents because tenants have limited options. Having fully occupied units in an undersupplied market is a major red flag that you’re underperforming.
If your market is oversupplied (more than 8 square feet per capita), there’s still room for rent increases, depending on your competitors’ prices. If theirs are significantly higher, you can strategically raise your rates without losing your position as an affordable market option. In fact, if you’re an independent operator in a market with a lot of REIT locations, which always push rates to the highest possible threshold, you can often ride in their wake, increasing your own revenue while maintaining slightly lower prices.
For example, let’s say you’re charging $80 per month for 10-by-10 drive-up units. A new REIT facility opens up a mile away and offers a newer, sleeker 10-by-10s for $110 per month. In this case, there’s room for you to raise rates 5% per quarter for a year and still be the more affordable option.
Another important item to evaluate when considering self-storage rate adjustments is consumer income level. You must understand your customer demographics.
In particular, median household income is a key metric because it can be used to determine the prices the local market can bear. If it’s is low, it may be difficult for people to afford higher rates, which could lead to a loss in occupancy that’s difficult to replace. If it’s high, you may be able to raise rents without losing existing tenants or discouraging new ones. In short, income level can help you determine whether a bump in price is reasonable and fair given the financial circumstances of the community.
Perhaps the most important factor to consider when setting your self-storage rental rates is competitor pricing. It’s important to monitor your competitors’ rates and stay close to them in your pricing structure. Remember: Having a fully occupied facility means you’re making less money than other operators in the market.
There are several tools and services in the industry designed to help you monitor local self-storage pricing. They’ll allow you to make informed decisions and ensure your rates remain competitive. In some cases, all you have to do is enter your address and a desired radius, and you’ll get a list of facilities within that area, including their rates for various unit sizes. You can then compare this to your own rates and adjust as needed.
You may be happy with your revenue and occupancy until you realize your rates are 20% less than your nearest competitor and there’s only 3.5 square feet of self-storage per capita in your market. I highly recommend that whoever is responsible for setting rates for your company use these tools or consult with a trusted broker at least quarterly to produce a competitive analysis.
Putting It All Together
Now that you have a basic understanding of the factors to examine before raising rates and potentially creating vacancy at your self-storage facility, let’s bring them all together, so you can see how this information might inform your decision-making.
Let’s say there are two similar self-storage sites in Johnstown, New Jersey, roughly three miles apart. On is a REIT that has studied the local demand, demographics and competition and set the top rental rates. The other is Joe’s Self-Storage, an independent facility. The manager and owner believe they’re doing everything right. To make it simple, we’ll pretend both sites offer the same number of units.
The REIT has lower occupancy, but it charges more and has significantly higher annual revenue. There’s a reason the self-storage REITs are immensely successful: They dissect each of the factors we’ve discussed above to optimize their income at every property. It should also come as no surprise that none of them strive to operate at full occupancy.
Now that you can clearly see the correlation between rates and occupancy, run through a real-world exercise to see if there’s some wiggle room in your self-storage unit prices. You may be surprised to find that your tenants stay put through a reasonable increase. These are the types of customers you want to have throughout your facility.
Michael Palladino is an associate with The Bledsoe Self Storage Group of Marcus & Millichap, a commercial real estate firm with offices throughout Canada and the United States. His team serves buyers and sellers in the Northeast and mid-Atlantic markets. Michael joined the company’s Philadelphia office in 2021. He previously worked in marketing with a large multi-family property-development group. To reach him, email [email protected] or call 215.531.7095.