The self-storage acquisition market is as competitive as ever, with prices and capitalization rates at record levels. For the investor looking to grab their slice of the pie, a smart strategy can be to sniff out less-than-stellar assets. If you can add value to an underperforming property, it may allow you to enter a market you wouldn’t otherwise be able to afford. It can also make the difference in your decision to invest, helping you achieve an acceptable return.
Additional real estate value can come from many sources, especially in an industry like self-storage where each facility is a real estate asset but also an operational business with cash flow. Following are several strategies consider for your new acquisitions and existing properties.
One of the fastest, easiest ways to have a positive impact on self-storage business revenue is to raise rental rates. Many facility operators are reluctant to raise rents, and most don’t do it regularly. As a result, their rates can be 20% to 30% below market average. There’s a reason the real estate investment trusts and large third-party management firms are so successful: They have rate management down to a science! But it requires discipline and in-depth market knowledge.
In the accompanying table, you’ll see how adding a small amount of rent to each square foot per month has a tremendous impact on facility revenue and value. Raising rents can cause a short-term bump in vacancy, but the number of tenants who leave is generally minimal, usually much lower than operators assume. Don’t be afraid to raise rents. Your competition is doing the same!
When a self-storage facility is built, the developer and owner make assumptions about what the market wants in terms of space (hopefully based on thorough research). However, consumer demand and market needs can change over time. If your new property is experiencing above-average vacancy in certain unit sizes or types, an adjustment may be in order.
Generally, combining smaller units to make larger and vice versa isn’t overly complicated or expensive, but check with your building provider. Additionally, you might consider adding small lockers in interior locations or portable-storage units to replace parking or excess land where permanent construction isn’t viable.
More self-storage operators are looking at full or partial facility automation as a way to streamline the business and generate more revenue. For example, you might consider adding self-service kiosks, online rentals, autopay features, automated access control and other popular innovations that can allow you to reduce office hours and even staff time.
Eliminating payroll has a level of benefit similar to raising rents. At a 5% cap rate, a cost reduction of $48,000 annually will increase the market value of a facility by $960,000. Combining aggressive rate management and facility automation can increase property value significantly.
Adding the ability to generate solar power isn’t only the “right” thing to do, it’ll nearly always be a profitable addition to a self-storage facility. In most cases, the use of solar panels will offset your utility costs. You might even generate excess energy you can sell back to the utility via a power-purchase agreement. You can also consider adding backup-battery systems that store your solar power for overnight use.
Assuming a monthly savings of $400 and recycling our 5% cap rate from above, the potential increase in facility value is $96,000. With the average solar-panel system costing $30,000 to 40,000, this is an immediate win and will add to your bottom line for years to come.
One of the best ways to increase self-storage facility performance is to add new revenue streams. Selling the basics like locks, boxes and other moving supplies can help you incrementally boost profit and customer satisfaction, but there are many other ancillaries you can consider. For example, some operators sell ice, propane, camping supplies and more, which are particularly helpful for their boat/RV-storage customers.
Of course, boat/RV storage is a great add-on profit center in and off itself! Don’t forget about wine storage, records storage, fine-art storage, truck rentals … the list goes on.
Two popular offerings that can generate decent add-on revenue in self-storage are tenant insurance and tenant-protection plans. The institutional operators report significant profit from the sale of these products. Generally, margins range from 50% to 80% depending on the provider and revenue-share model, which can translate to $4 to $6 per tenant per month. The average adoption rate is 80%, though it can be much higher. It really depends on how the offering is presented to the customer at the time of rental.
The accompanying table shows an example of how you can increase self-storage value with these programs. They can be wildly profitable if made a consistent part of your rental process. (As in the table above, we’re assuming a cap rate of 5%.)
Finally, don’t underestimate the value of basic curb appeal and site maintenance. Renters are generally more comfortable at a property that feels safe. A clean, well-lit, welcoming self-storage facility will generate more traffic and allow you to consistently charge a premium. So, take pride in your facility and the rewards will come.
As you can see, there are many ways to add value to a self-storage operation—significant value in many cases. When you hear about investors buying facilities at low cap rates with high prices, they generally see a property that offers upside through many of the above strategies.
Tom de Jong may be reached at (408) 282-3829 or at tom.dejong@colliers.com
Thomas de Jong, SIOR, MBA is Senior Vice President with Colliers International’s National Self-Storage Group and is active in self-storage brokerage, asset dispositions, site selection and self-storage consulting across the US with real estate licenses in NV, PA and CA.
