Over the last decade, the self-storage industry has become extremely aggressive in revenue and expense management. On the revenue side, operators of all sizes have experienced an explosion of income due to strong markets, enhanced pricing techniques and new technology. At the same time, large operators have cut expenses by using their size and synergies, while small operators have leveraged technology and the expertise of vendor partners to help drive down costs.
This has been positive for two reasons. First, it drives stronger net operating income (NOI), which in turn produces stronger facility value and increased returns for investors. Second, this success has attracted more investment to the industry, which provides new opportunities and streamlined exit strategies.
Now, before we pat everyone on the back, this robust operating environment also has a very real and potentially devastating downside: complacency.
Due to strong self-storage demand, most operators have focused solely on the revenue side of this equation while cutting expenses as deep as possible. This seems logical, of course, because why pay for things such as marketing, payroll, sales training and technology when your facility is consistently well-occupied?
As with most markets, things are generally good until you wake up one morning and find out something has changed. The self-storage industry has been developing new facilities at an impressive pace over the last few years. Some of these new competitors are just starting to come online and others will be delivered soon. The danger of this “boiling frog” scenario is several operators either haven’t experienced, or may not recall, how to function in more aggressive environment.
As the industry evolves from one driven by strong demand and limited supply to one that’s far more competitive, expense management will need to be guided by optimization strategies rather than black-and-white increases and decreases. Marketing, payroll, maintenance and property taxes are just a few of the areas that need to be reviewed. Let’s examine key considerations for each.
When reviewing your marketing expenses, there are a variety of questions to ask, including:
- In what kind of digital marketing will you invest? Will it be pay-per-click campaigns, social media, aggregator services, search engine optimization services?
- What kind of website will best showcase your property to potential customers? What will it cost to build, optimize and maintain it?
- What kinds of programs will you offer to promote reviews or testimonials about your facility?
- Will you offer a referral program? If so, what kind of expenses will be associated with it?
- What kind of programs will you implement to market to local businesses including apartment complexes, realtors and movers? What are the costs involved?
- What kind, and in what condition, is the signage on your property? If it requires repair or replacement, how expensive will that be?
- In what kind of tools will you invest to track the effectiveness of your facility’s marketing and sales efforts?
If you’re contemplating still other marketing tools or strategies, consider the effect they’ll have on your cost-per-tenant acquisition. In a competitive environment, marketing is key, but you need to track the effectiveness of your campaigns. Fund only the programs that drive a strong return on investment.
As much as our industry believes in the future of automation, people are still the driving force behind facility success. It’s still a people-to-people business; and as markets heat up, it’s extremely important to have staff who can explain why your property is the best choice. Remember, most people who contact you have never used self-storage. The average customer doesn’t know one facility from another, so we must effectively convey key points of differentiation to prospects.
Competition for good employees has been raging for years. It’s been reported that retailers such as Target and Walmart are starting new hires at $11 to $12 per hour. For some storage operators, the variance between their current payroll and entry-level retail associates has most likely diminished. Payroll expenses will continue to rise as the cost of labor increases due to a robust economy.
Experienced facility managers are and will continue be incredibly valuable as more self-storage supply comes online. If you’re developing a property, the speed at which you lease up and stabilize is extremely important, so it’s imperative to sufficiently compensate staff. If you already have a successful team or need to hire one, make sure you’re prepared to address this issue.
To compete with new competitors, existing self-storage facilities must have great curb appeal. Your landscaping, driveways, paint, buildings, access gates, security components, HVAC systems and management office all must be maintained and optimized.
In sociology, the “Broken Windows Theory” states that if a neighborhood or a city doesn’t fix its broken windows and graffiti, the environment will “continue to descend into crime, chaos and violence.” Though this might sound extreme, it holds true, even in self-storage. If a customer visits your property and sees something that isn’t well-maintained, he’ll immediately apply the deficiency to the rest of your site and you may lose the sale. Investment in capital and general repairs as well as preventive maintenance is necessary.
Due to the economic recovery and strong investment environment, self-storage facility valuations have skyrocketed while municipalities adjust millage rates in the background. As a result, operators should be prepared for an increase in their annual property taxes.
If you believe your facility has received an overly aggressive valuation by the local tax authority, you have the option to challenge it; but in the big picture, these increases are something you’ll have to address annually. Unfortunately, there’s no way to spin a benefit for property taxes on a cash-flow basis. This is essentially a sunk cost, which is why every other expense item must be optimized for maximum performance.
A Fine Instrument
Facility expenses should be considered as a strategic, precision-based investment, not just “something you have to pay for.” Cost reductions should be made using a scalpel or laser, not a machete. Remember, facility-operation teams use these funds to satisfy the current customer base and obtain new tenants. For example, both new and current renters appreciate when the HVAC units work in an area marketed as “temperature- or climate-controlled.”
Consult with your management team as you consider expense increases and decreases. Far too often, there’s a disconnect between how self-storage facilities operate and what they require daily vs. what’s been projected in a finance-based pro forma. As with any other investment, the way you proportion funds and track their effectiveness will make all the difference.
Matthew Van Horn is a co-founder of Atomic Storage Group, a full-service management company specializing in joint ventures, property management, feasibility studies, marketing and consulting within the self-storage industry. He’s also the co-author of the book, “Self Storage Domination.” To schedule a free 60-minute self-storage strategy session, visit www.atomicstoragegroup.com.