Raising Rents:

Posted by msmessenger on Jan 1, 2016 12:00:00 AM

It’s A Strategy, Not an Option

All self-storage operators, irrespective of size or the geographic region where they are based, need to have a well thought out strategy for raising the rents they charge. Although it is often not the most enjoyable part of the job, a business’s continued success demands it.

But for even seasoned self-storage operators, the question of increasing rents can be difficult. Over time, local economic conditions may deteriorate, an area’s competition may intensify, or on-site managers can become friendly with long-time customers, all of which present challenges. These factors can give decision makers pause when wrestling with the question, especially if it is the local manager who has the authority to raise or not raise rents.

Better judgment, of course, suggests a passionless approach. As with any profit concern, fixed costs invariably rise. Increasing wages, rising property taxes and utility rates, and needed building maintenance all make regular rent hikes a business necessity, not a luxury.

In addition to growing revenue, rental rate increases also serve another objective: building and maintaining credibility with the customer. On this point, a bit of psychology comes into play. While everyone loves a good deal (hence the popularity of a first month for $1), the American consumer does make an association between price and value. If an item or a service is priced unrealistically low, it will understandably arouse a customer’s suspicions. In the case of the self-storage industry, she will wonder if the unit she’s renting will be clean, accessible, and secure.

Rate Considerations

Industry experts are not of one mind on the subject of rent increases. For example, some advocate automatic, across the board increases on a tenant’s anniversary date. Whereas others take a more nuanced approach, relying on sophisticated revenue management tools to integrate rate hikes with an overall management strategy.

Ken Nitzberg, CEO of Emeryville, Calif.-based Devon Self-Storage (a privately held self-storage company with stores in 18 states) begins his approach in a two-tiered manner. First, he starts by increasing the “rack rates”—the rents charged to new tenants—and takes a more cautious angle with existing clients.

“When rent is hiked on an existing tenant, they must make a ‘stay or go’ decision,” Nitzberg explains. “Let’s say I have 10 people each renting the same size space for $100 per month. If I raise them 10 percent each, but five of the 10 decide the cost is too high and leave, I’ve got to re-rent four of those five to just break even. On the other hand, if I incorporate that increase to the rate I charge a newcomer—provided the local market will bear it—I’m a lot safer, since my tenants don’t know what each other are paying.”

Nitzberg emphasizes that the economic health of the immediate market is hugely important. “Being in 18 states with 47 stores, we can’t apply a blanket rate to every location across the country,” he says. “Some places have recovered beautifully from the recession of 2008 to 2010, but others are still struggling.”

Rent specials are another factor to consider. “Examples might be the first month for a dollar, a discount if the first three months are paid in advance—that type of thing,” says Nitzberg. “The added cost of providing these incentives must be made up somehow.”

Nitzberg also cites another distinction, separate but related to rent increases: pricing. Taking a cue from the hotel industry, where a room with a king-sized bed might be offered in standard, deluxe, or suite editions—and command different prices—Devon Self Storage has begun to classify its units by the amenities they offer and price them accordingly.

“If an indoor 10-by-10 is right off the door or close to the elevator, it’s a ‘superior deluxe’ spot at $120 a month,” Nitzberg explains. “If it’s at the end of the hall, hard to get to, and has a pole in the center, it’ll go for $90 a month.”     

In addition, Nitzberg emphasizes the need to blend the use of technology with the human element. “We do have access to revenue management software, but we tend to use it as a backstop—we emphasize the human element more. We have some of the best on-site mangers in the industry and we trust them to offer constructive input, but we don’t let them set prices.”

The bottom line, according to Nitzberg, is this: “We think that saying ‘we raise the rents 10 percent each cycle’ is too simplistic.”     

The People Approach

Industry veteran Elizabeth Schlesinger, managing director/head of self-storage at W.P. Carey, Inc., offers another perspective. The company owns more than 200 stores nationwide and outsources management, but retains authority when determining rental increases. Although the corporate parent is publicly held, its storage assets are held within a series of managed funds.

W.P. Carey follows the general industry trend of implementing increases of around 10 percent about six months after a tenant’s move in, followed by another hike at nine month intervals thereafter. The timing of the second increase is variable for reasons of customer perception.

“We don’t want to leave an unpleasant taste in our customers’ mouths,” says Schlesinger. “We use revenue management tools to a considerable degree. It’s a very sophisticated analysis that takes into account unit type, level of occupancy, level of nearby competition (generally within a three-mile radius), and the overall market conditions. For example, if a number of competing facilities opened nearby, we would show much more restraint.”

Schlesinger stresses the intensely local nature of the industry, which can occasionally mean that decisions made by the corporate office can be overridden by on-site managers. “We’re very cognizant of these local conditions. We believe in certain systems and processes to run our facilities, but we also believe in people. We see no point in hiring an on-site manager if that person is not empowered with the ability to take an individual’s customers situation into account. That’s what we pay them for.”

“We have a chain of command, but it starts with the customer and the local manager,” Schlesinger says. “These are our customers at the end of the day. We see them as people, and more than just numbers.”

Schedules And Management

Jim Stevens, Salt Lake City-based Extra Space Storage’s senior vice president for real estate, explains that his company takes a two-tiered approach, with each portion being distinct. “We schedule rent increases on a fixed timetable—at five months after a tenant’s move in, and at each nine-month interval thereafter, he says. “In this respect we’re a bit more aggressive than many of our competitors. We arrived at this after doing a great amount of research. We needed to determine a cycle that would result in the least likelihood of a customer moving out due to a rent increase.”

Stevens explains that while the timing of his company’s increases are predetermined, the amounts are not. “They’re based on a large number of factors, including what a tenant’s rate is at move in and what the going rate is at the scheduled time.”

Despite his company’s adherence to hiking rates on a regular schedule, Stevens justifies the need to maintain good customer relations. When the infrequent complaint occurs, the situation is addressed. “Occasionally something may come up with an individual tenant that a local manager informs us about,” he says. “In these rare instances we may make exceptions to the amount of an increase. But since the dollar amounts of our increases are quite small, most customers simply accept them.”

Extra Space, like many of its peers, embraces revenue management software to gather and distill the myriad of necessary data.

The William Warren Group, based in Santa Monica, Calif., has been especially aggressive in utilizing revenue management. The company is a privately held owner, operator, and developer of self-storage facilities throughout the U.S., and also provides management services to third-party owners.

Gary Sugarman, the company’s chief strategy officer explains how his firm goes about implementing revenue management. “We start with a program that aggregates a great deal of raw data, including the characteristics of a particular market, the nearby competition, our available inventory, and our overall vacancy rate,” he says. “That information is then put into an algorithm which works to identify demand of a specific unit size, in a specific market, at a specific time. The program then sets prices accordingly within pre-defined parameters.” 

This method is used to determine both move in prices and the amount of increases for existing customers. Regarding timing, the William Warren Group generally increases rents after a tenant’s first nine months, then once annually thereafter. This schedule is one of the variables that can be programmed into the company’s revenue management algorithm.

Sugarman is quick to point out, however, that the system is not allowed to run on autopilot. “Based on our own observation, we can see when an anomaly in a certain market will demand either a smaller or a larger increase that the algorithm suggests,” he says. 

According to Sugarman, larger self-storage operators similar to their company have the resources needed to do revenue management at a level on par with the hotel and airlines industries. “Our smaller competitors may say they use revenue management, but in reality they’re using ‘rules based systems’ that analyze their markets and make projections on the direction rates and increases should go,” he says.  

The Pricing Game

Determining how much of an increase to put in place for existing tenants can tricky. From percentage-based increases to flat dollar amounts, everyone seems to have a unique system for raising rates. It may take some trial and error to figure out what works best for your facility.

In general, industry professionals agree that it is best to be aggressive. Raising rates by only a dollar isn’t a good idea according to Diane Gibson, president of Cox Armored Mini Storage Management in Phoenix, because there is no room to negotiate. In fact, she states that no increase should be less than $4. Her company raises rates four to seven percent annually depending upon the property and location. On the other hand, other companies base their increases entirely on demand.

If determining the rates sounds like a daunting task, be aware that there are software programs available to assist you. Gibson explains that you can set automatic increases through software programs that enable you to monitor street rates and tenant rates. Management software programs can be set to increase rates based on occupancy percentages or vacancy. Some even provide lists of tenants who haven’t received rent increases; store comparisons for multiple properties; and sophisticated reports, charts, and graphs.

Source: Self-Storage Management GuideBook published by MiniCo. www.ministoragemessenger.com

A Strategic Plan

Regardless of the level of sophistication, the concept can still appear mind-bogglingly complex. Stripped to its core, revenue management boils down to a simple description: a strategic plan to effectively manage revenue and maximize returns. This involves reviewing the prices charged by the competition as well as a complete understanding and buy in by the facility managers.   

To put it even more simply, revenue management provides real-time analyses of supply and demand, determining the optimal price within certain parameters.

Nitzberg offers a good analogy: “If I call American Airlines to book a round-trip flight from Detroit to San Francisco and back and get a given price when the plan has 10 unsold seats, then you call a few seconds later when there are just five, you’ll get a very different fare. That’s how revenue management works.”

The degree to which various players adopt this strategy varies. “We feel that as a smaller company we have some excellent on-site managers, and this is why we don’t embrace revenue management to the extent our larger competitors do,” Nitzberg says. Generally speaking, the larger the player, the greater the role revenue management will play in their decisions on pricing and rate increases.

Despite different approaches taken by various owners and operators, one common thread stands out: the fact that raising a customer’s rent, while never the most pleasant aspects of the job, is essential to the long- and short-term survival of any business. When rent hikes are integrated into a sound overall management strategy, the likelihood of success increases exponentially.

Paul Vachon is a freelance writer and editor based in Detroit. He is the author of four books and has contributed to publications such as Pacific Standard, Preservation, HOUR Detroit, Michigan History, and Costco Connection.