Self-storage has seen record performance over the last two years as consumer habits shifted during the coronavirus pandemic. Now, with stimulus checks a distant memory and wages failing to keep up with climbing inflation and interest rates, people are looking to tighten their belts. How will you protect your facility’s net operating income (NOI) as demand and rates begin to soften? Following is advice on how to adapt.
An Overview of Market Changes
Typically, the self-storage industry is seasonal, with demand increasing in mid-spring and peaking in summer. Yet during the years of the pandemic, occupancy remained stable all year long. Though rental rates continue to outpace pre-2020 figures—a source of optimism for owners and managers—we’re seeing the return of a more traditional market cycle, with rates beginning to soften.
A boom in construction is also having an impact on supply. Over the last five years, developers have built 256 million square feet of self-storage space, equal to 15.6% of the country's total inventory, according to Storage Café, an industry marketplace powered by property-management-software provider Yardi. As a result, some markets are now oversupplied, which will further drive down rents.
But even though self-storage inventory is increasing, the number of net rentals per capita is also on the rise. People need storage when they experience big life changes, and these tend to happen more frequently when the economy is under strain. This will help stabilize the market in areas where supply threatens to outstrip demand.
Again, rental rates are dropping; but this decline is thrown into harsher contrast for having come off a record high. While self-storage owners and managers must now tailor their operational approach, the new reality isn’t as dire as it might seem. You just need a plan for handling each market’s unique variables, which can be easier said than done.
Bracing for Change
As the self-storage industry braces for a leveling in demand, facility operators need to focus on protecting their NOI. The major players will likely have the resources to insulate their owned assets against turbulence, but smaller operators without the financial backing to weather the shift will be considerably more vulnerable.
As interest rates rise, banks will conservatively adjust to account for the additional perceived market risk. The rising cost of debt will compress debt service-coverage ratios, loan-to-value or loan-to-cost, and a few other key variables. In most cases, a borrower will be forced into a lower-leverage loan, reducing returns and putting upward pressure on capitalization (cap) rates. For those operating within strict debt covenants, these market and industry shifts could quickly become a serious problem.
Since cap rates, interest rates and market conditions fall outside of your control as an owner, investor or facility manager, protecting NOI is the only viable path to preserving your property value. Consider the following.
Plan promotions. With self-storage supply rising and demand normalizing, the picture may look precarious. The best way combat the decline in rental rates is to create a market-responsive plan for every facility in your portfolio. Focus on promotions, but realize that not every program will perform well in every area. To drive your lease velocity, test different campaigns to see what works best.
Price dynamically. You must be prepared to respond to fluctuations in supply and demand, and that means carefully controlling your self-storage inventory and rental rates. Steer away from multi-month discounts so you can maintain flexibility, reduce concessions when possible and pivot toward greater revenue. A dynamic pricing strategy that focuses on unit types and occupancy will drive results. Your high-demand, shorty-supply units should command a premium, while your low-demand, high-vacancy spaces should be discounted to incentivize rentals.
Track marketing spend. Your self-storage units are finite. Even in a highly competitive environment, you only have so much space to rent, and rates can only go so low. There shouldn't be a race to the bottom to earn market share. Instead, leverage the right combination of promotional strategies to capture demand.
To find your best formula, test different marketing approaches, allowing enough time to evaluate the efficacy of each. As always, the key is in the data. You can optimize your customer cost-per-acquisition by collecting and analyzing campaign results, maintaining a close eye on your marketing spend, and investing in organic drivers like Google and Yelp reviews.
Focus on quality. Though consumers appreciate low sticker prices and promotions, the quality of a product remains crucial. Self-storage tenants are willing to pay more for better service, access to helpful resources such as moving carts, and the peace of mind of knowing they’re storing their goods in a clean, secure, well-maintained facility. As you look to boost income and trim expenses, offer best-in-class amenities to differentiate yourself in a crowded market.
The self-storage market has evolved. If you harbor concerns about your facility's resiliency, you may do well to consider a strategic operating partner. A third-party management company can help diversify revenue streams and augment marketing, promotion and pricing tactics for a store's overall profitability.
NOI preservation is an essential part of safeguarding your self-storage asset against a challenging economic environment. As debt costs and cap rates creep up, focus your resources on preserving property value, first by targeting occupancy and then by adjusting rates to drive profit.
Rents are softening, but only in light of the historic highs of the past two years. Self-storage isn’t headed for a crash; it’s simply normalizing. With the right strategies, you can respond to new market conditions, protect your asset and remain competitive.
Rob Moreno is vice president of business development for Store Space Self Storage, a family of companies that owns, operates and third-party manages more than 100 properties in 22 states. With more than a decade of executive sales experience, he leads the sales team in driving business-to-business activity, including third-party management, joint ventures, partnerships and acquisitions.
Anthony Young is director of revenue management for Store Space. He joined in January 2020, and has played a critical role in shaping and improving company processes. He’s also a doctoral candidate in business administration, management and operations at the Donald R. Tapia School of Business at Saint Leo University. For more information, email [email protected].