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Measuring Facility Performance: Optimizing Self-Storage Revenue One Square Foot at a Time

Measuring Facility Performance: Optimizing Self-Storage Revenue One Square Foot at a Time

Self-storage operators regularly use physical and economic occupancy to measure the financial health of their properties. Read why maximizing income per rentable square foot is a better, more consistent way to optimize your revenue-management efforts.

For many self-storage operators, “revenue management” means pricing units based on vacancy and competition, and then raising rates once per year. I challenge you to be better, think deeper and break out of that mindset. After all, self-storage is a commercial investment, and like other asset classes, our rates should be based on maximizing income per square foot. Revenue management is about money in the bank, not locks on unit doors.

To truly understand revenue opportunities in self-storage, we must appreciate the magnificent possibilities afforded in offering rentals by the month. Short-term contracts allow us to renegotiate terms every 30 days. We aren’t locked into lengthy leases. This gives us enormous flexibility in adjusting market and tenant rates to drive occupancy and revenue.

For example, we can change street rates as often as we’d like, using settings in our management software or adjusting them manually. Further, by optimizing our unit mix, we can set pricing in the micro rather than the macro. In other words, we can improve our asking price by size until we reach our maximum potential, rather than look at the property as a whole.

A Tricky Dance

Don’t be fooled by the surface-level simplicity of this approach. This dance is trickier today than it’s ever been. Self-storage operators must balance customers coming from multiple sources: online aggregators, company websites, lead generators, walk-ins, drive-bys and others. Facility managers need the proper tools to close all these leads and generate revenue for the property.

The problem is many owners, particularly those in lease-up, approach revenue management with a sledgehammer. They choose to fill the property by any means necessary, throwing bargain rates and $1 move-in specials around as a standard operating procedure rather than a strategic tool to be used only when necessary. When the breakeven point is 24 months away, every unit is empty and debt must be serviced today, the appeal of sacrificing an extra $5 for a lock on the door is incredibly tempting. It’s also shortsighted.

A well-developed revenue-management strategy should hit financial benchmarks, but with thought to how specials, discounts and occupancy affect money in the bank. When the day is done, only cash collected pays the bills, no matter how many units are rented. To build your own plan, you need a basic understanding of the metrics needed for review and how to change them to get the desired results. Let’s look at those metrics now:

Physical occupancy (also referred to as unit occupancy) is the measurement with which most facility operators are comfortable. It’s the number of rented units, regardless of price. If you build 10 units and have nine rented, physical occupancy is 90 percent.

Gross potential revenue is how much total money a property can make. If each of 10 units rents for $100, the gross potential revenue is $1,000.

Economic occupancy is total revenue captured out of the gross potential. Again, let’s say we have 10 units that normally rent for $100 per month. If eight are rented for $100 and one at $50, with one empty, the actual rent collected is $850. Our economic occupancy is only 85 percent, even though physical occupancy is 90 percent. Economic occupancy is important because it offers insight to market and tenant rates.

If the market rate drops to $80 per unit, our gross potential rent drops to $800. If nothing else changes, our economic occupancy is now 106 percent (850 divided by 800). As you can see, economic occupancy is easy to manipulate. It fluctuates with market value.

A Better Way to Measure

Rather than measure property performance by physical or economic occupancy, there’s a more consistent way. Reviewing revenue per square foot (RPSF) provides a constant to determine how a self-storage property is really doing financially. While market and tenant rates can be manipulated, net rentable square footage doesn’t typically change. Let’s see how this sketches out, assuming our 10 example units are 10-by-10s, giving us 1,000 rentable square feet.

  • Using the rental rate of $100, the gross potential rent is $1,000 per month, or $1 per square foot.
  • If nine units are rented at $100, actual rent is $900 per month, physical occupancy is 90 percent and RPSF is 90 cents.
  • If eight units are rented for $100 and one is rented for $50, physical occupancy is 90 percent, but economic occupancy is 85 percent, or 85 cents per square foot.
  • If market rates drop to $80, physical occupancy remains at 90 percent and economic occupancy jumps to 106 percent. However, RPSF is still 85 cents. If I now give away the 10th unit for free, physical occupancy jumps to 100 percent, but economic occupancy remains at 106 percent and RPSF stays at 85 cents.

Looking at your self-storage performance on a per-square-foot basis gives you a baseline, especially in this time of rapidly changing market rates. As competition heats and prices constantly change, your economic occupancy will vary.

Optimizing facility income is about maximizing RPSF. How much can be squeezed out of every rentable square foot? Aside from rent, look at the total revenue collected including administration fees, late fees, pre-lien fees, truck rentals, ancillary income and anything else that can be charged. How profitable is your property, and how can you increase that number?

Look at it on a gross basis (how much can be made from the property) as well as a net basis (how much is going into the bank). Providing discounts to ink leases might seem great, but that doesn’t pay the bills or count in a refinance.

Time for Action

Now that you understand the metrics, it’s time to put them into action. Viewed together, occupancy and RPSF offer a lagging indicator to the health of your business and strength of your staff. For a clearer picture, it’s essential to know demand expectations and monitor your closing rates. Regularly tracking and reviewing these items will help ensure you’re charging the proper street rates. After all, you don’t want to sacrifice street rate for occupancy, or you’ll find yourself trying to make up lost revenue in other ways.

Once your street rates are dialed in, then you can look to increase existing tenant rates. This should be done by size and, like street rates, based on demand. If a renter is paying $75 and the market is at $100, you should feel comfortable raising the rate if you know there are five demand events for that unit size and the closing rate is 95 percent. Even if “Mr. $75” moves out, someone else will rent that unit very quickly at the higher rate.

When all is said and done, adjusting your rental rates is merely one component of a well-executed revenue-management strategy. Understanding what the numbers mean and how to manipulate them to accomplish the desired results will help you create a well-balanced plan that ensures you maximize the per-square-foot profit of your property.

Magen Smith is a co-founder of Atomic Storage Group, a boutique self-storage management company, and owner of Magen Smith CPA, an outsourced accounting firm specializing in self-storage. She’s also a partner in Safe Space Development, which builds self-storage properties. Magen started in the industry as a facility manager and has held nearly every operational role. She has a passion for the industry, helping owners improve their businesses, teaching asset management and conducting self-storage audits. To reach her, e-mail magen@selfstoragecpa.com.

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