Raising Rents in Self Storage: Rip the Ban-Aid off

My Philosophy on Raising Rents: Rip the Band-Aid off

While there are many factors in raising rents and the best to way to go about doing so, I subscribe to raising rents to get customers to market or very close to market as soon as possible regardless of the amount of price increase needed to do so. Factors that may affect this strategy include current occupancy, competition in the area with vacancies, condition of the units, and size of the facility amongst many. While I know others that prefer to slowly raise rents over time, I believe the risk of lost income far outweighs that of increased vacancy. The best strategies in my opinion are often the simplest and clearest, so we have broken it down into 4 guidelines.

1. Raise rents for only a portion of your facility at once

Based on the price increase we follow the diagram below:

10%

1 Stage of entire customer base

20%

2 Stages of 50% of customer base

30%

3 stages of 33% of customer base

40%

4 stages of 25% of customer base

Based on the amount of units in the facility we follow the following diagram:

<100 units

1 Stage of entire customer base

101-200 units

2 Stages of 50% of customer base

201-350 units

3 Stages of 33% of customer base

>351 units

4 Stages of 25% of customer base

The first thing I almost always hear when people see the diagrams are, “You have done a 40% price increase on customers before?!” The answer is a resounding YES. If the demand is there and the pricing is justified, we are comfortable with allowing the customers to leave if they will not pay market or very close to market prices. Even if we lose all the customers 40% below market, I only must be 60% occupied on the units that they leave vacant to make the same amount of money. I would prefer that scenario with much upside to being 20-30% below market at 100% occupancy.

In some cases, the strategy of how many stages to implement based on both diagrams may be completely off. For example, if I have a facility with the 400 units, but we are only doing an 8% price increase, we typically will give greater weight to the price increase guidance and go in only 1 or 2 stages.

Now as an exception, if you are doing your price increase on a takeover of a facility, consider the communication preferences of the tenant. If your primary outbound communication with your customers is through email/text and your tenants do not have an email and/or prefer to pay by check, we typically will notify these tenants of a price increase to market at the same time they are being notified of the change of ownership. These tenants do not fit into our target business model so often we dedicate more time serving this small group of customers which in turns increases our operating costs. For this reason, we choose to make the transition of the facility as seamless as possible by trying to communicate the price increase and the change of ownership immediately to tenants we must call or use postal mail.

2. Provide 60 days’ notice to prepare for the rent increase in a letter thanking the customer for their loyalty

With the extended notice, also let the customer know you are providing a discount to what you are currently charging new customers. While the discount may not be a discount to market prices, it will be a discount to what you are currently charging new tenants. Clearly state that if the customers choose not to stay, that you hope the extended notice of a price increase of 60 days is enough notice to allow them to make other arrangements. It is imperative you allow the tenant to know you understand you may lose their business, so you don’t spend time arguing on the phone with tenants threatening to leave. You would think it would be obvious that you are aware of those risks but by stating so it will save your staff or call center a significant amount of time when the customer is already aware you are alright with this outcome. If more customers leave than expected for the first stage of rent raises, you can refine your approach to notify fewer tenants at a time to allow more time for releasing and/or do a smaller price increase.

3. Notify the customers with the greatest rental variance first of their price increase.

The customers that are furthest from paying market price get notified first. Your opportunity cost is greatest with these customers and if they are paying well under market, its going to take too much time to get tenants up to market in stages. If you’re going to lose customers, the customers you want to lose are the ones well below market rates. By raising rents on these customers first, you also will have the greatest indication of how the rent raises will be received by the rest of the facility.

4. Always raise rents on new units until leaseups slow.

The easiest way to raise rents are before customers move in. One of the biggest mistakes I see small operators make is that they are happy with 100% occupancy and no turnover. While I know there are many large operators that believe optimal occupancy is 90-93% I would stress that this highly dependent on market size as well. I don’t mind 100% occupancy or close I just want to make sure that we are raising rents until we determine what the optimal price is. If a unit gets leased up in less than a week the next unit that comes available gets a 1-3% price increase until our leaseup slows to 2 weeks or more. By doing this if we discover our price ceiling is above that of rest of the facility by more than 10% then we consider a price increase for the rest of the facility. Most of our facilities are in secondary and tertiary markets but depending on market size and demand we do an increase every 12-24 months. In very dense populations areas with high demands, I may even suggest 6 months but that is because of the large customer base and ability to turn tenants over frequently. If you’re in an area of high population growth and demand is constantly increasing, there is a good chance your customers will accept the increase more frequently due to lack of supply, they are used to cost increases in general for being in the market, and/or you are obtaining new customers altogether.

While the guidelines in this article are generalized to many markets, we do want to note that the most important thing to support rent increases is buying in strong self-storage markets. Markets with high vacancies, declining population and poor economies are difficult to raise rents in general and many of the guidelines above are predicated being in strong markets.

Written by Charles Kao