The REITs new pricing strategy – lowering web rates and then implementing dramatic increases just a few months down the road – is a double-edged sword.
Yes, they grow revenue by getting people in the door and counting on most not leaving when the aggressive rate hikes kick in. On the other hand, many tenants wind up feeling taken advantage of due to the lack of transparency, giving the industry as a whole a very bad look.
And while REITs may have started this game, independents are having to follow suit in order to compete. This goes for an independent facility that I own as well. I wrote about this situation in a prior rate hike story and promised to share how mimicking this strategy has worked out. So let’s dive in.
First off, a little background. This facility was opened in April 2023 and pricing followed the norm, taking into consideration the market, demographics, competition, and so on. Things were progressing well, with rentals ramping up monthly. That all changed when a nearby Extra Space Storage facility began offering 5x5 units for $25.
How could they get away with such a low rate, I wondered? I suspected that rate would not last for long. To confirm my suspicions, I put on my detective hat and rented one of those units myself. Sure enough, 60 days after the move-in I received a notice that rent was going up in 30 days.
Of course, many tenants unfamiliar with the industry didn’t see this coming and they took the bait (and suffered the switch, I presume). As a result of these deeply discounted Extra Space web rates, our facility’s rental velocity slowed considerably, impacting our occupancy lease up target. Making matters worse, the interest rate on our construction loan had more than doubled since we started the build. We couldn’t sit idly by; something had to be done.
Taking a page from the REITs, we sent out 108 rent increases that went into effect on November 1, 2023 based on tenant move-in anniversaries. So what happened?
Sadly 17 tenants moved out, while three transferred to smaller units. However, 88 stayed with half accepting the full increase and the other half negotiating a slightly smaller increase. When all was said and done, our total revenue increase was 56 percent.
Now, in a normal rent increase scenario we’d expect to lose three percent of the customers. In this case, we lost 16 percent. However, we deemed this acceptable because of the net increase in revenue. What was less acceptable? Upsetting a lot of customers in our market. Some of them threatened to go to the news, and our Google Reviews suffered (somehow Extra Space’s reviews never do? They’re going to need to teach me that trick).
So was it worth it? Yes. Would I do it again? Not exactly. REITs have the data, much more than any independent operator has (be sure to take our data sharing survey and help us correct that). Armed with that data, they can prepare themselves for the reaction to pricing changes and know that they are going to be okay with the result, just as I was with this facility.
But in the long term, is it a good practice for the industry? No. Just because the data tells you that you can do something, it doesn’t mean you should. It’s just not good to have a reputation for treating customers this way even if you can get away with it. Not to mention, these tactics could even leave some operators open to consumer litigation claims. Where there are lawsuits there’s media coverage, and where there’s media coverage there are legislators looking for a win. What does legislation lead to? You got it – rent control. And that’s something no one in the industry wants, regardless of size.
So what’s next? For this facility, potentially more of the same. A Public Storage-managed facility is opening across the street in 2024 and they will likely play the same game. And we’ll need to keep playing too. This is the world independent operators have to compete in today, and I feel the industry as a whole is in for a world of hurt if these strategies continue.
As I wrote previously, I’d recommend that when signing a lease, self storage operators also have tenants sign an introductory rate addendum, stating that they understand the low rate they’re paying today is introductory, and that it will increase in the coming months. This is a temporary fix, for sure, but it will keep you covered. Ultimately, my hope is that in the future, rate games will become a thing of the past.
Travis Morrow is the President of National Self Storage. This article is part two in a series.