10 Pitfalls of Self Storage Rental Rate Discounts

Posted by Kerri Fivecoat-Campbell on Jun 20, 2023 12:00:00 AM

Does it make sense to offer rental rate discounts? That is the question every self-storage operator faces at different times. During the past few years, the lack of new self-storage facilities entering the market is one of the reasons the industry has seen high occupancy and record-breaking rental rates in many areas.

This means many operators haven’t had to face that question. However, recent indications are that rental rates in many markets are beginning to soften. Yardi Matrix reported moderating rental rates as of the fourth quarter 2022 and with more new facilities coming online, many industry experts predict a return to more “normal” rental rates and growth in the next year.

Brian Caster, CEO of A-1 Self Storage in San Diego, Calif., says the past two years have been atypical of any cycle he has seen in the past 42 years. “When we look at self-storage, especially in competitive markets where REITs are discounting and doing specials, many facilities are almost required to do it in any typical cycle,” he says. “The last two years haven’t been typical, but now what we’re seeing in some markets are new guys discounting heavily and it’s a race to the bottom.”

Nearly all industry experts agree there is a time and a place for rental rate discounts. However, there are many factors that should be considered when deciding to lower rental rates. If those factors aren’t considered it could lead to pitfalls not just for your facility but possibly affect the entire market. “Discounts are a tool and shouldn’t be the norm,” says Ann Parham, CEO of Joshua Management, a company of the Parham Group in San Antonio, Texas. “It really should depend on the market and economy.”

Another reason facilities routinely lower rental rates is during lease up. “The good use of a discount is to get bodies in during lease-up,” says Pam Domingue, owner of Storage Solution LLC in Huntington Beach, Calif., “I think with occupancy as high as it is, I feel like many operators are doing it out of laziness, they’re not highlighting their property and amenities properly.”

The 10 Pitfalls of Rental Rate Discounts

1. Operators having no reason to discount

Steve Mirabito, president of Storage PRO Management Company in Walnut Creek, Calif., says the biggest pitfall of dropping rates is a perceived need rather than a real one. “The trap is dropping rental rates when there is no discipline in understanding why occupancy has dropped,” says Mirabito. Along these same lines, Beau Agnello, senior vice president for Pogoda Companies in Farmington Hills, Mich., says if you do understand you’re losing occupancy due to pricing competition, you may not have a reason to discount all your unit sizes. “If you’re not looking at individual sizes and what you have available, you may be giving away too much or not enough,” explains Agnello. “There’s a time and place for it, but you need to make sure you understand your inventory.”

2. Competitors follow in a race to the bottom

When one facility starts to give discounts, everyone follows. Carol Mixon, president of SkilCheck Services in Tucson, Ariz., says she had a facility in Scottsdale that fell victim to a price war. “There were three new facilities in a five-mile radius, and they were lowering their rates,” says Mixon. “We couldn’t even implement our scheduled increases.” Domingue adds price wars can eventually hurt everyone in the market. “Sometimes when we’re in small towns, we all agree not to lower rates to avoid that,” she says.

3. When rates increase, you may be subject to laws preventing raising rents

Mirabito says one thing many operators didn’t consider before the pandemic was the implementation of anti-gouging and rent control laws. “You have to consider if you lower rates and something happens like the pandemic, you might be stuck for a long time with those rental rates,” he says.

4. Not understanding your customer base

Agnello says it’s very important to understand your customer base. “What is driving customer behaviors from them being a potential customer to a rental? Is it driven by price or something else?” Parham says a lack of understanding may lead to trouble with your bank. “If you don’t understand the customers and discount too much, you will have to go to your bank and report financials less than you expected and that’s never good.”

5. Your ability to return customers to market rate may be limited

“When you discount, if you want to go back up, you run the risk of the customer shopping elsewhere and moving out,” says Mixon. Most experts agree if you have to offer a discount, it’s better to offer the first month half off or free, which eliminates the necessity to sharply raise rates later.

6. Internet discounts can backfire

While it’s standard to offer an internet rate and a different street rate for those walking in, Mixon says customers are becoming savvy to the practice. “I was actually sitting with a manager who took a call, quoted the street rate and the customer said they were looking at a different price online,” says Mixon. “At that time, the company didn’t allow the manager to match that price if they didn’t rent online. That doesn’t build good rapport with potential customers.” Mixon says the policy was changed to allow the manager to offer the same online rate if the customer requests it but advises those rates shouldn’t be much more discounted than the street rate.

7. Discounts make lazy managers

“Managers won’t work as hard to sell if they’re allowed to give discounts to get bodies in the door, especially if they’re given bonuses on rentals,” says Domingue. Parham agrees. “The manager should first learn what the customer will be storing and help them choose a size as most customers don’t understand unit sizes,” says Parham. “Then, they give them a price and wait for a reaction. They should be doing a used car salesman pitch, giving a lesser discount first, if they must. If the manager only has two units in that size, they don’t have to discount.”

8. The discount may appear to be discrimination

Domingue says you must be very careful to ensure you’re not setting yourself up for a lawsuit by offering rental rate discounts. So, be clear up front about why a discount may be available. “I’ve heard a customer complain because he wasn’t 65 and said we were discriminating against younger renters. We also had a Hispanic woman claim we didn’t give her a discount because of her ethnicity, when she was trying to rent a unit size not included in the discounts.”

9. Discounts can damage your brand

If you discount too much too often, your customer base will start to see you as a “discount brand,” says Domingue. “It makes your facility or facilities look like a cheap, discount product.” Caster agrees saying, “Even if you keep your facility looking fresh and new, the customers aren’t differentiating between you and the big price discounters.”

10. Deep discounting may not attract long term customers

“A customer renting only for the discount will not likely be a long-term customer. They may also not be the best paying,” says Domingue.

The bottom line when discounting is do it only when these pitfalls can be minimized or avoided. “The most important thing,” says Agnello is to “generally make sure you understand how discounts are affecting you and the bottom line of your property.”

Kerri Fivecoat-Campbell is a freelance journalist based in the Ozark Mountains. She is a regular contributor to Messenger. Her business articles have also appeared in Entrepreneur, Aol.com, MSN.com, andThe Kansas City Star.

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