Being Smart About Street Rates:
Setting a Strategy for New Tenants
- Steven Minkus, Revenue Management Analyst
In the past few years, the self-storage industry has seen a boom in occupancy and revenue. Even through the COVID-19 pandemic, our industry continued to grow. But, as the saying goes, what goes up must come down.
Where we once saw markets pushing rents to unprecedented heights, we’re now seeing rates soften and stabilize. There are several factors contributing to this trend including inflation, increased competition, and the outflow of population from metropolitan areas. Simply put, things are getting back to “normal.” We no longer have a customer waiting to instantly move in when one moves out. Rents aren’t growing at the same pace. As a result, self-storage operators must take a deeper look at their rates for new customers to ensure units are priced correctly. People are more cost-sensitive, and you don’t want to push valuable business into the arms of those ever-increasing competitors.
Below, I’ll explore a strategy for setting street rates that allows you to entice new renters while still improving your facility’s earning potential.
Supply and Demand
StoragePRO has always used a supply-and-demand approach to setting and increasing rates for new self-storage customers. Our system scales pricing based on occupancy and variance to ensure we’re constantly maximizing growth potential.
It’s simple: If a location has more demand, rates are higher.
Raising rates in a low-demand market with ample supply is more complicated. In this case, having a strong understanding of your customer base is essential. It’s impossible to make good decisions without fully understanding your tenants’ lifetime value and acquisition cost, or seasonal demand. Generally, summer brings the most renters; however, if you don’t understand how long they’ll stay and what your costs are to get them in the door, it’s impossible to set your rates.
Ideally, you want to offer discounts that are temporary and for customers who’ll be in the unit for longer. For example, our internal data tells us that people who rent self-storage in November and December tend to stay the longest and, therefore, are the most ideal for short-term promotions. We do more to secure these renters because they’re worth more.
While there are those who believe rate increases are impossible to implement in an inflationary market, they’re wrong. If a market study shows that your rates are below those of your competitors, you should increase them until they’re in line. It also makes sense that if you’re getting higher rent from new customers, your existing tenants could and should be paying the same. Your rent-roll report will tell you who’s paying what and which customers should be targeted for an increase. This can be challenging, but if your entry rates are calculated correctly, it’s possible to see revenue growth, even in a low-demand market.
The first step in developing a pricing plan for your storage business is to figure out where you want your facility revenue to be. Is the goal to increase it by 10% this year? Is this feasible? Once you’ve set your objectives, take a deep dive into the market. What are your current rates? What are your competitors’ rates? What season is it? Once you have that info, you start to see where you are in the market. If your rates are at the lower end, you can be more aggressive with increases. Conversely, if they’re at the top of the market, increases may not be an immediate priority.
Staying on top of new customer rates is critical. If local market rates are moving up, so should yours. A price-scrubbing software can make this easier. It shows the rates and occupancy of everyone in a market, which can help determine trends and guide pricing decisions. Another great way to ensure your units are priced correctly is to conduct a weekly market survey. This will help you understand current demand, too. For example, if a study shows that the average price of a 10-by-20 is $225, but you’re the only facility with that size available, you could push your rate to $250. Taking small risks and knowing your competitors’ rates and inventory is key to making the most money, even in times of inflation.
Because customers in an inflationary market tend to have tighter budgets, some competitors will drop rates and fight for the bottom of the market. However, in this type of battle, both companies lose. Instead, offering a higher rate with a temporary discount can draw in customers and limit revenue loss to only a few months. Three months at half-off is better than 12 months at a static lower rate. It helps the customer and keeps your rates high. It also helps limit future rent increases for newer customers. If you fight for the bottom of the market and lower rates to fill units, in time, you’ll have to raise the rates on those customers or lose a lot of potential revenue. A limited discount is a win-win. The customer is happy to have a lower rate, even if it’s temporary, and you won’t need to raise the rent as quickly to bring them in line with market pricing.
Proper revenue management positively impacts a self-storage facility’s net operating income (NOI), which improves asset value. By charging higher prices for units that are in high demand and offering discounts during slow periods or on low-occupancy unit types, you can unlock your facility’s Total Property Performance.