As I walked into the self-storage facility, the manager behind the counter turned around slowly. “We’re about full,” he yelled across the room, smirking to himself and almost chuckling, as if I was crazy to have even walked through the door.
He stood up and leisurely made his way to the worn-out counter, arrogantly sliding a scrappy white notebook in my direction with a list of barely legible names edged in pencil and pen. “This is our waiting list,” he said proudly. “Just put your name down here and we’ll let you know if something turns up. Unless you want a 4-by-7 … We don’t have anything else.”
I politely declined, offering a big smile and extending my hand. “Hi, I’m Mark. What’s your name?”
You see, I wasn’t there to rent a unit. Like many other operators, I was simply completing a market assessment and familiarizing myself with the area. Other than introducing myself, I wanted to put a face with a name and learn more about our competition. Although the manager was a bit taken aback, our conversation continued; only now, he was much more protective of the information he shared. It was then he cautioned me to keep my rates low because his hadn’t changed his in years.
As sad as this scenario was to me, many other operators might think that being completely full is the ultimate joy. I understand it’s important to hold a high occupancy, but at what cost? Is 100 percent the best we can do? In my opinion, this manager was leaving all sorts of money on the table—all at the expense of his business.
If I were to tell you this was the manager behind your counter, would you be pleased? Is an old waiting list a good thing? Are you diligently adjusting rental rates or letting high occupancy be your idol? Are your rates dynamic and evolving or stagnant? Finally, are you administrating increases where needed and actively growing your rate per square foot (RPSF)?
Over the years, I’ve heard countless stories like the one above. These are well-meaning managers who focus solely on keeping the store full, their rates hardly ever changing. If you’re like me, you realize this strategy isn’t only broken, it’s a disastrous way to run your site.
Understanding occupancy and adjusting your rates is a necessity in self-storage. Active rate management can be complex, but it doesn’t have to be difficult. Although there’s a science to it, you can keep it simple; you just have to do it.
Years ago, my mentor explained to me that in the self-storage industry, there are two dials: occupancy and rate. When one moves, it tends to affect the other. How you react and adjust is up to you, but you must move them. Learn to work the dials on every unit, and plan accordingly. Here are some easy rules of thumb:
If your occupancy is declining, work your rates down. If it’s on the rise, work the rates up. Constantly adjust based on supply and demand, and work within the seasons of your move-in activity. You can evaluate this not only on the overall macro-level but on a micro-level for each and every unit type. Aim for 100 percent occupancy, but never truly get there.
What if your occupancy is way down, or you’ve just opened a new facility and are in lease-up? Then your strategy completely changes. In that moment, stabilization becomes king. At our company, 85 percent occupancy is our bare minimum. We regulate our lease-up targets along the path of 25, 45, 65 and 85 percent, all with the intent of landing at 85 percent as efficiently as possible.
With stabilization of more than 85 percent comes power. The cards are in your favor, and you can confidently adjust rates with current customers as well as new ones. We capture the lion’s share of rental income by reducing vacancy cost and maximizing a balanced combination of momentum and income. Again, we don’t just evaluate the overall occupancy but that of individual unit types. For example, if your occupancy on 10-by-10 units is on the rise, your rates should be, too. If they’re empty, then lower your rates; speed becomes of the essence.
The Power of a Penny
How about the middle? What do you do when you have an established store and you’re pleased with your current occupancy? Let’s assume your site is at 92 percent. You have balance and your rates are adjusting, but you still want to improve the bottom line. In that case, let’s turn our focus to the penny.
If I could offer you one extra cent on your RPSF value, would you take it? Do you know how much that could affect your store? As a self-storage operator, my primary responsibility is to maximize every dollar at each of our facilities. Every day, we use revenue management as the heart of our income growth; but at our established sites, we love to focus on small increments. Here’s how it works:
First, determine your current RPSF. Do you know what you’re earning per square foot at your facility? The basic calculation is total rental revenue collected, divided by occupied square feet. For example, $90,000 in monthly revenue, divided by occupied square feet of 60,000 equals $1.50. You might also see this presented as an annualized number, which simply means it’s multiplied by 12. In the case of our example, that’s $18. A lot of real estate investment trusts report it this way.
Now, add a penny. Take the original RPSF of $1.50 and increase it to $1.51. The same occupied square feet multiplied by the new rate is $90,600. That’s a net gain of $600 per month, or $7,200 annually. This may not seem like much, but could you imagine a 10-cent gain? That would be $6,000 per month, or $72,000 annually!
It’s easy to hypothetically add the penny, but how can you actually earn it? There’s a variety of ways to influence your RPSF. Here are a few:
- Raise overall asking rates. Raise your standard rates and improve your gross potential. Just like the RPSF, you can calculate the gross rate per square foot. First adjust this, and you’ll enhance your opportunity.
- Raise internal rates. Actively pursue internal rate increases and time them effectively through the season. Focus on tenants who are paying significantly below the new board rates and specifically on unit types that are near 100 percent full.
- Reduce concessions and discounting. By limiting this activity on new move-ins, you’re immediately adding to income. Just because you have the option to give a special, it doesn’t mean you always should. Only offer concessions on units that are highly vacant.
- Rent smaller units. This can give you an immediate boost. Often, the most valuable units are overlooked. For example, a 5-by-5 climate-controlled unit with an asking rate of $69 has an RPSF of $2.76. Add a bunch of these to your move-ins and watch your averages go up.
Overall, the power of a penny can mean tremendous growth. Multiple cents can be gained throughout the year, adding significant value to your site. The next time you meet with your management team ask them, “Can you earn me a penny more?”
Mark Poole is the director of operations for Liberty Investment Properties and president of the Florida Self Storage Association. Since joining the industry more than six years ago, he’s continued to pursue his education by collaborating with colleagues and leaders within the field, and has brought a fresh perspective and enthusiasm to operation, development and his management team. For more information, call 321.441.1693; e-mail firstname.lastname@example.org.