It’s Saturday morning. You get up, brush your teeth, and sit down in front of the television. You start flipping through channels and land on one of those National Geographic animal shows. In this episode they are discussing the Red Bellied Piranha. The show discusses their environment, their size, and their voracious appetite. It discusses how they hunt in packs and the speed in which they attack. You find the episode extremely interesting, but the hour is up and it’s time to start your normal Saturday routine.
Now, you’re probably not as interested in piranha’s as you go about your day, but what you fail to realize is those piranhas are no longer in the Amazon river. They are now stalking your self storage investment.
Every year, the expenses at your self storage facility increase. Utilities, Property Insurance, Property Taxes, and Payroll are just a few of the piranhas just waiting to attack your facility and take a small bite out of your investment. If you’re not increasing revenue to make up for these expenses, you will start to feel what I call the “piranha effect”.
The piranha effect is a simple concept.
Each year the expenses at your facility go up and without systematic increases in revenue these expenses will make extremely short work of your NOI.
Once the piranha effect takes hold, your facility is now in a cycle of static revenue, increasing expenses, and lower NOI, which directly attacks the overall valuation of your self storage investment.
To combat the piranha effect, self storage facilities must openly embrace and implement revenue management strategies. In order to incorporate these strategies, independent operators must accept two facts:
First, if your facility is 100 percent physically occupied then you are losing money. A high physical occupancy is typically a sign that a self storage market will support higher rates.
Second, Economic Occupancy is more important than physical or square foot occupancy.
Why is that? If your facility lowers street rates to $0.00, then you will be 100 percent occupied both physically and by square footage rather quickly, but your facility will have no revenue to show for it.
The goal for every facility is to be well occupied and charging the highest rates possible. This is measured using economic occupancy.
There are three types of revenue management strategies you should be utilizing at your facility:
Street Rate Management: These are increases in street rates that are accomplished by considering two items. The first is obtaining the unit rates of your competitors and the second is reviewing the occupancy of each size code your facility offers. To obtain your competitor’s rates draw a three-mile radius around your facility, identify your competitors, then obtain their rates by size codes, make notes about concessions and vacancies. You can also use a self storage data platform like Radius+ to assist you with this process. Once you have completed this process compare your competitors’ rates to your facility’s rates. Consider adjusting your rates based on market conditions. If you find that specific size codes are in demand at your facility, consider increasing rates on these units independently of the overall market.
Existing Customer Management: These increases should be automatically implemented through your facility’s self storage management software. A set percentage of increase will be applied to existing customers once they reach certain occupancy milestones. So, for example, a facility might increase a customer 6 percent, once every twelve months. Another facility may increase a customer 6 percent at six months, and then again every nine months after that. These increases will typically be in the range of six to 8 percent, but they can vary from market to market. The most important part of this strategy is to make it automatic. This will stop the debate about individual customers and will make sure the revenue management strategy is executed.
Variance Increases: From time to time review your facility’s rent roll and identify customers who have excessive rate variances. Ten years ago, your facility may have charged $100.00 per month for a 10x10 but now the street rate is $140.00 per month. Consider increasing these units to get them closer to the current street rate.
Revenue management is an essential strategy to help you combat the piranha effect at your facility. Don’t let the potential of a disgruntled customer keep you from executing your revenue management program. You always have the option of rescinding a rate increase if necessary, but this should be reviewed on a customer by customer basis. Executing a solid revenue management strategy will keep your facility competitive, profitable, and provide additional cash flow to address the piranha expenses.