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Rip Off That Rental-Rate Band-Aid! One Self-Storage Owner’s Approach to Price Increases

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There are many ways to go about raising rental rates in your self-storage operation. Each has its pros and cons. In this article, an owner shares a strategy that has helped his company carry out successful increases.

While there are many things to consider when raising your self-storage rental rates and choosing a way to do so, I like to get my customers to market rate (or very close to it) as soon as possible, regardless of how big an increase it takes to get them there. However, there are factors that can affect this aggressive strategy including current occupancy, competition, unit condition, facility size and others.

While some self-storage operators prefer to raise rents slowly over time, I believe the risk of lost income far outweighs that of increased vacancy. The best strategies are often the simplest and clearest. Mine is like ripping off a Band-Aid. I’ve broken it down into three steps below.

Step 1: Decide on New Rates for Existing Tenants

There are many ways to increase rental rates for your existing self-storage tenants. For example, you can increase everyone’s rent across the board or allow your management software to take the lead. I follow this approach:

  • 10% - One stage covering the entire customer base
  • 20% - Two stages, each covering 50% of the customer base
  • 30% - Three stages, each covering 33% of the customer base
  • 40% - Four stages, each covering 25% of the customer base

Based on the number of units in the facility, I also follow this formula:

  • <100 units - One stage covering the entire customer base
  • 100-200 units - Two stages, each covering 50% of the customer base
  • 201-350 units - Three stages, each covering 33% of the customer base
  • >350 units - Four stages, each covering 25% of the customer base

The first thing I usually hear when I share this method with people is, “You’ve managed to complete a 40% price increase on some customers?” The answer is a resounding yes. If the demand is there and the pricing is justified, I’m comfortable with letting customers leave if they won’t pay market rates. Even if I lose all the tenants that are paying 40% below market, I only need to be 60% occupied on the units they leave vacant to make the same amount of money. I prefer that scenario, which has much upside over being 20% to 30% below market at 100% occupancy.

For the record, there can be exceptions to my two-pronged strategy for determining the amount and number of price increases. For example, if I have a self-storage facility with 400 units, but I’m only doing an 8% increase, I’ll typically do it in only one or two stages rather than the four recommended by my formula.

Step 2: Notify Your Tenants

Before setting your plan in motion, prepare your self-storage tenants for the increase in a letter and thank them for their loyalty. Give them an extended notice of 60 days, and let them know you’re providing them with a discount on what you’re currently charging new customers.

The tenants who are furthest from paying market rate should be adjusted and notified first, as your opportunity cost is greatest with this group. It would take too long to get them up to the desired price in stages. If you’re going to lose customers, aim for these first. By doing so, you’ll give yourself a chance to empty those low-rate units and fill them with new renters at a higher price. You’ll also have a good indication of how the adjustment will be received by your other tenants whose rent won’t be raised by quite so much.

In your notice, clearly state that if the customer chooses to vacate, you hope 60 days is enough time for them to make arrangements for their stored goods. Tell them you understand you might lose their business, so you don’t spend time arguing on the phone with those threatening to leave. You’d think it would be obvious that you’re aware of the risks, but by stating so outright, you’ll save your staff and call-center representatives time and aggravation. If more customers leave than expected during the first stage, you can refine your approach on the next stage and notify fewer tenants at once, or execute a smaller increase.

Finally, if you’re executing rate hikes at a newly purchased facility, pay attention to tenant communication preferences. Your primary method might be email or text, but you may have customers who prefer phone or snail mail. At our company, these tenants don’t fit into our business model. We have to spend more time serving this small group, which increases our operating costs. For this reason, we try to make the transition as seamless as possible by notifying customers of the change in ownership and price increase simultaneously.

Step 3: Raise Rents on Vacant Units

Many smaller self-storage operators make the mistake of being content with 100% occupancy and zero turnover, while many large operators believe the optimal occupancy is 90% to 93%. I would stress that this is highly dependent on market size. Personally, I don’t mind 100% occupancy or close to it. I just want to make sure we’re raising rents until we find the ideal price.

If a vacant unit gets leased in less than a week, the next unit that comes available gets a 1% to 3% increase. I do this until lease-up slows to two weeks or longer. If I discover the price ceiling on empty units is above that of rented units by more than 10%, I consider a price increase for the entire facility.

Most of my self-storage properties are in secondary and tertiary markets, but depending on market size and demand, I do an increase every 12 to 24 months. In very dense areas with high demand, I may even suggest an increase at six months, but that’s because of the large customer base and ability to churn tenants frequently. If you’re in an area of high population growth and demand is constantly rising, there’s a good chance your customers will accept an increase more frequently due to lack of supply. They’re accustomed to cost surges in general just by being in the market, and you’re obtaining new customers altogether.

Bear in mind that the guidelines in this article are general and won’t work in every self-storage market. It’s difficult to raise rental rates in areas with high vacancy, declining population and a poor economy. My strategy is predicated on being in a strong market. Good luck.

Charlie Kao is the principal of Twin Oaks Capital, a Michigan-based commercial real estate company specializing in self-storage and multi-family assets. Services include real estate brokerage, asset management, feasibility studies, consulting and building-construction management. The company and its affiliates have owned, operated or planned more than 1 million square feet of self-storage. Charlie also owns House of Kaos Real Estate School, which provides continuing education credits for licensed realtors. He can be reached at [email protected].

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