What Should I Track?
Understanding the Metrics that Impact Facility Success
Metrics that Determine Success
The 1989 film, Field of Dreams, was famous for the line “if you build it, they will come”. Although that may be true for sports fantasy movies, it is not accurate when it comes to increasing occupancy at a self-storage facility. Substantial market research should be compiled before building, and facility layout and unit mix must be considered to optimize your ability to lease up and maintain stabilization. Knowing how to identify, access, interpret, and track value metrics is essential for owners, operators, investors, and developers to increase their likelihood of finding success.
Determining Occupancy
Physical occupancy is the percentage of units that are currently occupied by tenants divided by the total number of units. Economic occupancy quantifies the units that are revenue generating AND occupied compared to the total number of units. The higher your economic occupancy—the more profitable your business and the more valuable your asset. But occupancy is so much more than a metric of units occupied. If you truly want to maximize your return on investment, using occupancy to expose opportunities to increase rental rates, the needs for discounts, and determine the factors that impact demand will gain you a competitive edge in your market.
Occupancy and Rental Rates
While reviewing your rent roll, you notice that your 10X20 units are all always rented, and you consistently have a waiting list. This is a great time to capitalize on charging premium rates for this unit size. Understanding demand in your market and how to balance premium rates for desired units will allow you to capture more revenue. The opposite is also true. When looking at your 5X10’s you notice the highest vacancy rate across your unit mix. This is an indication that it is time to consider discounts/concessions, and in extreme cases conversion of unit sizes to meet market demand. Developers who ignore market demand when choosing their unit mix suffer from slowed lease-ups, increased discounting, and reduced profitability. All of which can be avoided with a thorough market study on occupancy and rates.
Occupancy and Discounts
This is often the most misunderstood metric in self-storage. Developers often believe that it is worth offering any type of discount to “get the building full”, but this leads to inaccurate reporting and large swings in revenue during lease-up. Existing owners worry if they offer lower rates to new tenants they will upset or even lose current tenants. This mindset will keep your units vacant longer and your NOI lower than it could be. Consider offering long-term tenants loyalty rewards versus letting existing customer concerns hinder your ability to make money.
Think outside the box when it comes to discounts and offer discounting that encourages the tenants you are trying to attract. Offer the 3rd month free with autopay, give an ongoing percentage off monthly rent for tenants willing to sign longer leases, or consider quarterly discounts for tenants with no late payments. Using discounts that support overall revenue goals will grow your business and maintain economic stabilization. Review your current discounts compared to your monthly operating income. If your discounts negatively impact your ability run daily operations it is time to give them an overhaul.
Occupancy and Your Market
We have all heard “location, location, location” when it comes to real estate and self-storage is no exception. The location of your facility (assuming it is already operating) is the hardest roadblock to overcome. You adjust rates, offer discounts, and utilize marketing efforts, but still have multiple vacant units, this is an indicator you could be in an oversaturated market. What is considered “oversaturated”? Normally markets that are over 10 SF per capita are considered oversaturated. This is not a standard that can be applied in isolation, but low occupancy, lack of growth (people, housing, etc.), and a high number of competitors can be a sign of oversaturation.
How can you solve the problem of owning a facility in an oversaturated market? Take a deeper dive into the community drivers in your market. Offer niche storage such as RV/Boat, parking, & specialty storage to provide you with solutions to increase reach more customers. Value-add services, loyalty programs, improved facility features, and improved technology can all help gain a competitive edge in an oversaturated market. Sometimes you have to spend money to make money, but before you spend mystery shop your competitors and come up with a plan to outperform them.
Other Valuable Metrics to Track
Rent Per Square Foot
Sounds pretty straightforward, the average rental rate per square foot of storage space, but all too often owners will focus on the idea of “average” rates and forget that the sales cycle in self-storage exists. Developers need to pay specific attention to rates throughout the sales cycle because if your facility delivers in Q4 your revenue generating ability will be lower than delivering in Q2.
For existing facilities, the rent per square foot should never remain the same throughout the year. This not only shows lenders and buyers that you are not leveraging rate increases, but it means you are leaving money on the table throughout the year. Rental rates determine your operating income and are indicators of potential income for your facility. Tracking the high’s and low’s in your market will allow you to adjust rates more efficiently, budget for capital improvements, and create growth opportunities for your business.
Revenue Management Index
The right time to use average rates is when determining your revenue management index. This metric analyzes the average rental rate of your facility and compares that amount to the market average. It is a good way to identify if you are charging too little or too much for your units and reveals the need to adjust rates to be more competitive in your marketplace. If you determine that your rates are the lowest in your market, rates need to be increased even if occupancy is high. Don’t be fooled by the idea that your occupancy is high so charging market rates does not matter—it does, but you do not have to make up the rate difference all at once. Choosing to have small, incremental rate increases over time can allow you to recapture lost revenue without sacrificing customer satisfaction. Although you may receive some complaints, they will be minimal if rate increases are communicated well and not excessive. Revenue generated by rate increases can be reinvested into your facility to increase your chances of attracting higher end customers in the future and provide opportunities for customer retention programs.
Monthly Rent Roll
Rent roll is designed to analyze the effectiveness of your rates, areas for improvement, and opportunities for growth. It is the monthly revenue generated by your facility from all revenue sources (rental income, fees, admin charges, and miscellaneous). Further, this valuable report provides you with insight into unrentable units, vacant units, and delinquencies. It creates a clear picture of your property’s cash flow and determine opportunities to increase revenue, review/adjust lease terms, and identify areas of underperformance.
The Benefits of Metrics
Maybe you have heard the saying in sports that “game film doesn’t lie”. It is used to emphasize that film provides objective, undeniable proof of what happened. For storage owner, operators, and investors, facility metrics are your game film. They represent an unbiased assessment of what is happening at your facility, and allow you to make better decisions, gain a competitive edge, and deliver successful results. If you want to improve profitability analyzing the metrics that determine success is the first place to start.