Minding The One Percent

Posted by msmessenger on Aug 1, 2017 12:00:00 AM

As industries evolve, the competition gets fiercer and the stakes become higher. The things that used to be minor differences in execution and results become magnified, creating the chasm between mediocre and exceptional. That phenomenon is becoming ever clearer in our great industry. In the coming year, and beyond, it is evident that to be a top-notch investor, owner, operator, or manager in self-storage will require planning and execution on the one percent items at 110 percent effectiveness.

The one percent decisions a developer makes on unit mix used to seem trivial. For example, what’s the difference between an average unit size of 95 square feet and 103 square feet? Probably minor, right?  Wrong. The answer can be three to five percent in higher vacancy due to not understanding one’s client base and market supply; or it could mean the difference in $100,000-plus of future unit mix conversion costs. What about the difference in assumed stabilized occupancy? Do all assets stabilize at 90 percent, 92 percent, or 94 percent? The reality is that assuming one standard stabilized occupancy no longer works. The answer depends on many factors including current market supply, future market supply, and the size of the subject asset. If one is choosing to build, or buy, an asset that is 109,000 net rentable square feet, it will all but surely have a different stabilized occupancy than the 56,000-net-rentable asset. A few points of occupancy over the course of a 10-year proforma/investment can be the difference in six figures of NOI. Developers yield can be impacted with simple assumption changes such as how many tons of HVAC per square foot, hallway lighting spacing and the use of LED vs. fluorescents, or assets designed with swing doors vs. roll-up doors for the small units. The differences between these three items can equate to $2 to $3 more, or possibly less, on a per square foot basis in terms of the cost to construct a property, much less the cost to operate it on an annual basis. Suddenly, experience and studying this business counts for a lot! 

Operations is equally impacted by the one percent decisions such as the generation of leads and conversion of those leads into rentals. The operator who follows up only once and closes five percent less of their leads each month, over the course of each year, and in turn the course of a 10-year investment, is spending a larger amount on advertising to generate the demand to stay full and is likely running at a lower occupancy with lower rates than their competitor who is following up five to seven times and clicking on all cylinders related to closing percentages.

In summary, the business remains simple, but it is far from easy. In fact, one could contend that in this era of self-storage it has become easier to screw up and have a less than favorable investment than it is to succeed, which is inherently most attributable to it being easier not to execute well on the one percent items. The positive side of this challenge is that all it takes is focus, planning, execution, and review of the results to become good at the one percent items in our business. Let’s commit to being great at the one percent! 

Happy renting!