Want to increase the value of your self-storage facility before selling or taking out a loan? Start by optimizing your rental rates. Your net operating income (NOI) is a key component in the equation buyers and banks use to value your property. The higher the NOI, the more the facility is worth. Optimizing rates for new customers and existing tenants is a powerful tool for boosting your NOI, especially in times like these with sustained levels of elevated demand.
If you haven’t yet implemented a rate management system at your self-storage facility, doing so now could reap tremendous benefits. Whether you’re planning to sell your site or just looking for long-term growth, consider the following advice.
Rental-rate management is the practice of adjusting your self-storage unit prices based on market conditions. In many ways, it’s a supply-and-demand exercise, used to maximize profit on occupied units or drive demand for unoccupied ones.
Dynamic pricing is a form of rate management in which prices for a product or service are adjusted in real time based on market data and possibly data about the purchaser, such as their location. Airlines and hotels use it all the time to maximize revenue, and so do the biggest self-storage operators. At its most basic, dynamic pricing involves raising rates on the unit sizes in which you have very low inventory and lowering prices on unit sizes and types you have available in abundance. It also factors in how other operators in your area price their units.
The approach to adjusting unit prices based on market conditions will vary for occupied units (existing tenant rates) and unoccupied units (street rates). With the former, the goal is to maximize profitability while limiting churn.
For example, you could systematically push a 5% increase on each tenant every 12 months. Most renters won’t be happy about it, but they likely won't move out over for a few extra dollars. If they do, you can quickly replace them with new tenants who’ll pay a higher rate. However, if you tried to raise those rates 10%, you could face a mass exodus. That would indicate you’ve pushed prices too far out of the optimal range. The key is to not go overboard with rates but raise them just enough so they’ll be absorbed without losing too many tenants.
Setting prices for vacant units, on the other hand, is more about managing your business-to-market conditions. Employing a dynamic structure can help you lease units at a higher price and achieve a better profit margin when inventory is low. Conversely, if you have a surplus of a certain unit type, it’s a clear sign the price is too high and should be lowered.
Of course, self-storage operators have always done this in one way or another, either using pen and paper or a spreadsheet program. However, there are more data points available today than ever before. With the right technology in place, that data can be aggregated and computed in real time, and your online prices can be automatically updated to reflect market conditions. You can determine how often, by how much and by what criteria these changes are triggered.
Boosting Facility Value
How does optimizing rental rates boost your self-storage facility value? To answer that, we first need to understand how property value is calculated. You need two key pieces of information: your annual NOI and the capitalization (cap) rate for self-storage facilities in your market. Investors use the cap rate as a gauge to compare the expected rate of return for different commercial real estate investments. High cap rates indicate risky but potentially lucrative deals, while lower cap rates indicate less profitable but safer deals.
If you look at recent self-storage transactions near you, you can determine the average cap rate, and then you can calculate your facility value. For example, if the cap rate is 5% and your NOI is $100,000, your facility would be worth $2 million in today’s market ($100,000 / .05 = $2,000,000). But what if you can increase your NOI? If you were to raise it by just 5% to $105,000, you could increase the value of your business by $100,000 ($105,000 / .05 - $2,100,000).
As you can see, small incremental changes can have a huge impact on your financial situation. Consider how this action repeated over a three- to five-year period could improve your self-storage business and its value. With rental-rate management, it’s wise to model a number of different scenarios to see how your bottom line will be impacted. This exercise will help you find the “Goldilocks zone” for your prices, meaning you can set them “just right” to achieve your desired goals.
Implement a System
Ready to start? Chances are good that you could implement dynamic pricing right now. Many self-storage management software products offer this ability already; it’s just a matter of turning it on and setting it up. Once activated, you only need to monitor and adjust as market conditions change. Otherwise, the software will make sure your prices are set accordingly. Here are some more pointers for implementing a revenue-management program:
- Gather and analyze data. Look at your current pricing and competitors’ rates. Also, consider your occupancy rates and the average length of tenant stay.
- Identify where you can improve. Pinpoint what you think you can do to capitalize on rate increases.
- Learn what technology can do. Spend time learning the capabilities of your technology stack. You’ll want to use it to its fullest to do most of the legwork for you.
- Build a plan. Make a decision on increases—how much, how often—based on the data you have available. Start simple and small, testing theories with a few unit types here or there until you can study the results.
- Refine strategies. As you progress, you’ll soon be ready to implement rate management throughout your business. You’ll likely want separate strategies for occupied vs. vacant units.
- Automate it. Many self-storage operators make the mistake of doing the research, manually updating prices once and moving on. That only yields a small, one-time benefit. With a fully automated strategy, the additional time spent setting it up will pay dividends now and in the future and help you avoid mistakes.
- Measure, adjust, improve and find your sweet spot. There’s art and science behind self-storage pricing, so spend time reviewing what worked, what didn’t and continue to finetune regularly.
As you can see, the financial benefits of rental-rate management and dynamic pricing are outsized when compared to the small investment in technology required to implement. Hiring a self-storage technology provider that offers robust workflow customization and access to reliable market data is critical to success. The sooner you begin, the more money you stand to make.
Al Harris is the editor of Storage Beat and content manager at Storable, an Austin, Texas-based supplier of cloud-based access control as well as management software, marketing services, payment processing, website development and other services. He obtained his degree in journalism from Virginia Commonwealth University. He loves reading Elmore Leonard novels and listening to classic country music. For more information, call 888.403.0665; email [email protected].