Push Rents & Pull in Profits

Why, When, and How to Raise Your Rates

By Stuart Wade

In many markets, average self storage rental rates per square foot equate roughly to average two-bedroom apartment rental rates per square foot. Is this a great thing or what?! Imagine, self storage investments produce the same per square foot income as apartments at significantly less construction costs and far fewer headaches; when was the last time self storage operators got a midnight phone call from a customer complaining of a broken furnace or clogged sink?

For maximum profit margins to be realized, however; the rates charged to customers must remain close to the highest the market can bear. There is no mystery to this; in any industry supply and demand will dictate what profit levels are achievable. For the self storage industry, this is where rent increases come into play.

Good For Business, Good For You
For most self storage managers, more income for the facility means more money in their own pockets as well. A bonus structure based on increases in gross income is becoming more common in the industry, and even managers who aren’t paid according to profits can generally expect an annual or semi-annual pay hike. Where would these funds come from if revenue remained flat?

An owner who feels his manager is looking out for the business and is mindful of the supply and demand forces within a market knows that he or she has a valuable employee who is more than just help behind a counter. Of course the more valuable a manager is to the owner, the more his/her job security is enhanced and the more likely the manager will receive raises and promotions.

Pushing rental rates can also provide the extra money for capital improvements that you feel will make your self storage facility even more appealing to customers. What improvements have you been dreaming about for your site? New paint? New signage? Upgraded landscaping?

Most of us understand why to raise rates, but how should it be done? How do you determine rental rates at a facility opening, and when do you adjust the rates at an existing facility? It’s really not as difficult or as stressful as some managers and operators make it out to be; it just involves some basic market research and an honest examination of what your facility’s selling points are.

Setting Rates At Opening
When opening a facility or performing due diligence on a potential self storage site, a prudent operator will uncover what rates competitors within the facility’s market area (usually a one- to five-mile radius) are charging for units of various sizes. The researcher should also note the unique selling features of each facility.

Factors such as location, security, curb appeal, manager’s competency, and hours of operation should be examined as well. Recording the features and prices on a spreadsheet is a good way to highlight the differences between each facility.

When opening a new facility, one approach is to avoid setting your rates at the highest price point relative to your competitors; instead, set rates closer to the mid-range. For example, if the pricing within your geographic area for 10-by-10s ranges from $60 to $80 monthly; offer 10-by-10s at around $70 or 10 to 15 percent below the market rate leader. At opening, you should be willing to wheel and deal but try to avoid a straight reduction of rates, as this will be difficult to make up later. Instead, give short-term discounts and up-front freebies. It is important to understand that the objective with a new facility is to generate counter-activity and achieve stabilized occupancy as soon as possible. With that understood, when can we begin to push rental rates?

Time To Push
Before beginning the process of evaluating your property for a rate adjustment, it’s important to understand the difference between street rates, contract rates, and push rates. Sound confusing? Don’t worry, it will become clear in a moment.

Contract rates are the rates current customers are paying per their lease agreements and any increases that have been implemented. Some operators peg revisiting contract rates to a calendar schedule based on annual, semi-annual, or even quarterly reviews. One of the drawbacks to this approach is that new customers may get hit with an increase only a few weeks or months after renting a unit. Another approach to contract rate adjustment may be to tie it to the anniversary date (quarterly, semi-annual, etc.) of the lease date. This approach automates the process somewhat since the adjustment is programmed into the software at the time of rental and it ensures that the customer will never get a premature increase.

When contemplating an adjustment to contract rates, evaluate demand for each unit size. It is important to recognize that when multiple units sizes at your facility reach targeted stabilized occupancy, which for most operators is about 90 percent, it’s time to review your pricing structure. Even in markets where overall occupancy is soft, there may be individual unit sizes that are in demand and can be raised. Two common mistakes made by operators are failing to evaluate their facility rate structure often enough and basing the decision to adjust rates on overall facility occupancy.

“Street” rates can be defined as the rate you will quote to someone who appears at your counter interested in renting today. We can begin to adjust street rents upward when any unit class approaches targeted stabilized occupancy. For example, let’s say you had 150 10-by-10s in your inventory. When your available inventory is down to about 15 units (90 percent occupancy within your 10-by-10 unit class), this would be a good time to raise the street rate for that size.

An aggressive example of manipulating street rates known as “rent pushing” is based on the premise that the customer at the counter frequently needs a space and is typically less interested in shopping rates at that point. Accordingly, how much you can adjust your rate in this scenario is less a function of market conditions and more about unit availability and what that customer is willing to pay at that moment. The resulting rate is the “push” rate or the rate for that unit at the particular moment.

Street rate adjustments are typically larger than the periodic adjustments to contract rates and they can be adjusted far more often than contract rates. Operators who understand the value of pushing street rates frequently adjust rates weekly or even daily. Once again, an alert, well-trained manager can bring in significant extra income for his or her owner through this technique. It should be noted that publishing rates via preprinted rack cards, a Web site, or elsewhere can inhibit an operator’s ability to push rates at the counter.

The Manager’s Role
Managers should be part of the rent adjustment process. They should monitor the supply and demand characteristics of each unit class and alert the owner whenever a given unit size and class falls into imbalance with supply and demand.

The manager behind the counter also has the very important job of communicating new rental rates to the customer base. Complacent managers dislike being the “bearer of bad news” when notifying customers about contract rent raises. They fear they’ll bear the brunt of upset customers’ wrath and believe they will have to deal with a rash of move-outs. Experienced managers, however, will work hard to increase customer acceptance of rate increases because they know that very few customers actually do move out simply because of a rent hike of a few dollars. And they know that if their market evaluation was on target, those who do move out will be quickly replaced at the higher rental rates.

In fact, how well customers accept rate increases has more to do with the manager’s approach than any other factor. Customers affected by increased rental rates should be called before they receive letters of notification. This is a good opportunity to practice customer relationship management. A phone call saying “I just wanted to let you know your rent will be going up from $100 to $107 next month” is not relationship management.

On the other hand, using the following language can make a big difference in how a customer accepts the news: “I wanted to let you know I just met with my owners. As you know, the cost of running a business has gone up. In fact, our property taxes here in Chesapeake have gone from $6,000 two years ago to $60,000 currently. Due to this, I’m going to have to adjust your rent from the present rate of $100 to $107. I just wanted you to hear that from me before you got a letter, and I wanted to know that I’ll be continuing to work hard to earn your business.”

Of course there are some customers with whom you may reach a line in the sand as far as pricing. There is no way to know where that line is, and sometimes, customers will move out. A temporary drop in occupancy of a few percentage points, however, is typically more than offset by the increase in income derived from the higher rates on all the occupied units.

Setting rental rates is simply a matter of understanding supply and demand and having a process in place that will ensure that your rates are appropriate for market conditions.

Stuart Wade is a member of the Self Storage Now! Editorial Advisory Board and is Director of Sales and Marketing for Norfolk, Virginia-based AAAA Self Storage Management Group, a full-time operator and developer of self storage facilities since 1973.