It's time for some good news! As the economy slowly improves, we have observed an increase in rental rates and occupancy of self storage properties around the country. It is important to note that there are still some parts of the country that are struggling more than others, and even the improving economy will not solve an ill-conceived project as the market is more competitive today than ever before. Below I have outlined the basics of raising rents and the possible benefits it has to your bottom line. In today's age of revenue management systems and sophisticated operators, it is more important today than ever to have a plan in place when raising rents!
Once a self storage facility has reached a stabilized occupancy level, a common business practice for owners to explore is an increase in rents in order to increase income. Of course, controlling operating expenses and negotiating deals for supplies and services can improve a location's bottom line each year, but even in the best cases, it is hard to significantly improve NOI without raising rents on a regular basis. Now, the key word is regular, not annual, semiannual or other, but regular. Let's take a look at why this is important.
Let's assume that we have 500 units and our unit mix is as follows:
If we raise our rents by 5%, both for existing and for new customers, our monthly income potential goes up as follows:
Over the course of one year, this could result in as much as $29,670 in additional income and possibly even more should the unoccupied units get rented. Remember though,we said that regular increases are the key. Thus, let's assume that we raise our existing and new customers and after a three or four month period, the new customers are not resisting the new price. Should we raise the "board" or "asking" price again? The answer is yes. As long as we continue to push the rates and do not receive any new customer resistance, we should look at this each month and ask ourselves if we can raise them again. The hard question arises when raising the issue with our existing customers. How often could or should we raise their rents? Is one time a year reasonable, or can we push the issue and raise them every 6 or 9 months? The answer is not always clear-cut, but here are some questions to ask yourself:
- Are we at or above our competition?
- Do we turn over our property every year? In other words, in a 500-unit facility, do we have 500 or more new customers each year?
- Are we willing to risk losing existing customers over a rent increase, knowing that we will probably get a new customer at the higher rate over a reasonable length of time?
- Are our expenses increasing at a higher rate than our rent rates?
- Are we treating our facility as our own, and getting too personal with our customers?
If the answer to one or more of these questions is yes, then it is obvious that you should look at increasing rents on a regular basis.
Most owners wish that the on site management team would continually raise rents because it creates more revenue for them. Managers have a hard time raising rents for existing customers because often times they become friends with the customers and they do not want to make their "friends" unhappy.
In most cases, managers are willing to raise "board" rates for new customers. My guideline is this: do this first and see if you get price resistance from potential customers. If you do not, then slowly increase your existing customers. For example, increase your 5 x 10's first and see how the customers react. If you do not have many move out due to this alone, raise another size. Keep trying this and you will probably end up with very few customers being so upset that they will move out. And if they do, remember that if you are doing a good job of selling units, the next customer will be paying the new rate anyway.
I have a company wide policy that if we are 95% occupied or higher for three consecutive months in any size, we will raise the board rate. I have had cases where we have raised the board rates 3 or 4 times in one given year, and have still maintained a high occupancy. Our policy is to also raise rates for existing customers if they have been storing with us for 9 months or longer and our occupancy rate is over 95%. This way, I know I can increase my income steadily, not have too many customers at any one time getting rate increases, and still have the ability to back off if I run into price resistance.
Self storage managers take pride in building and maintaining occupancy. While a 100% occupied facility sounds good, in reality it usually means you are pricing your unit mix too low. I would rather have a facility 92% occupied and increase the rents 3 or 4 times a year than have a facility 100% occupied for the entire year at lower rates. Usually, a store at the lower occupancy rate will make more money than the one that is 100% occupied.
After all, isn't making money our primary objective?
Raising rates always is delicate work, but the rewards of a higher income property will always pay off in the long run.
Mel Holsinger is a Principal of Argus Professional Storage Ma n a g eme n t , a f u l l s e r v i c e t h i rd p a r t y ma n a g eme n t c o m p a n y. H e c a n b e re a c h e d a t 5 2 0 - 3 1 9 - 2 1 6 4