Self Storage University Podcast: Episode 50

Occupancy, Rents And Their Often Inverse Relationship

Many self-storage owners and buyers have the wrong impression on the relationship between occupancy and rents. Due to this misunderstanding they often miss out on important opportunities to boost revenue. In this Self-Storage University podcast we’re going to unlock the mysterious relationship between rents and occupancy, and how to harness that knowledge for greater profits.

Episode 50: Occupancy, Rents And Their Often Inverse Relationship Transcript

There are many mathematical theorems, scientific formulas, but there's not that many of those in the self storage industry, but there is one tricky one, and that's the inverse relationship between occupancy and rents. This is Frank Rolfe, The Self Storage University Podcast. We're gonna talk about the ins and outs and the formulaic conclusions of occupancy and rent. Let's start off with the tools that we need to analyze a specific property. We have to know what is the current occupancy, how many units total in the facility, and how many of those are occupied. Next, we have to know what our current rents are. Now, they may be all over the map, sometimes mom-and-pops have them in all kinds of different rent levels, but what's the rough average of all those rents together? What is our current rough rent? And then finally, what are the comps on all the other storage facilities in your market regarding those two items? Occupancy and rent.

Now, once we have that data, let's then move on. So here's the strange inverse relationship between rents and occupancy. You see, pushing up rents theoretically should yield higher vacancy. It makes complete sense if I charge more than some existing customers will leave and some who are considering renting might change their mind a go to a competitor or just simply not rent at all. And higher vacancy typically equals lower rents, because if we have higher vacancy, then we're gonna think, "Well, you know what, I need to lower my rent 'cause I really need to boost my occupancy."

Maybe you're in a level which concerns you as far as hitting your mortgage, paying your expenses, maybe it might even be a violation of your loan covenants as far as the open would maintain. So we all would get in kind of a panic mode based on the amount of vacancy that the property has, but the key item to think is that really, we all need to find our balance point. By balance point, I mean at what occupancy will I be if I am at full market rent? And then what do I do when my vacancy increases? What do I have to put the rent at in order to get back to the occupancy? Not all properties at full market rent are going to be hitting 100% occupancy.

So when you have the typical person who buys a self storage facility, they believe their job is to fill it, they wanna have every unit 100% occupied, but to get there, what they often will do is make a mistake. They'll say, "Well, I'm at 80% occupancy and I really wanna get to a 100%. So I'm gonna go ahead and lower the price. I'm gonna put it out on giant banters out front even stating I have a low price move in special month's free." The problem is, when you do that, look at what it does to the perception of all your existing customers. Don't forget that the average self storage customer will be visiting their belongings on a regular basis, they'll probably even drive by your facility frequently. What message do you send to them when you advertise all these price specials? 

And additionally, what happens when you lose existing customers who suddenly say, "Wait, this rent isn't fair, I'm paying too much?" You're now offering everyone else a lower price. What about when they take that personally and feel that to be unfair and they decide to move out? Then what have you done to yourself? So the key is, don't be afraid to have some vacancy while you find your balance point. Now, if you think about it, new customers should be at higher rents, not lower. If you buy a storage facility and the market rents are far higher than what you're at, you're gonna wanna move people up, but often what happens is the owner does the reverse, they reward the new customers with a lower rent in their frantic attempt to boost occupancy.

You really want to give your existing customers, if someone was gonna get lower rent, you want it to be the existing customers, people who have been there a long time, you wanna reward them for their patronage, that's what all industries do today when they give... For example, Southwest Airlines, frequent flyer miles. They're trying to say, "We appreciate you as a customer, and we wanna reward you for your continued work." You don't wanna reward new people off the street to the detriment of those who have been there a long time. So when you have vacancy, you're really gonna wanna price those units at full market price, not at some huge reduction. That just makes good business sense.

Now also, you're going to wanna find what is the most profitable mix for your property on rented occupancy. If I go and boost my rents up to full market and I lose some degree of customers, will I not make that back with the aggregate of all those individual increased rents? And then can I fill up those remaining vacant spaces, not by doing a heavy deep dish discount, which alienates my existing customers, but instead fill those at current market rents? Do I have the ability? Am I desirable enough? Is there enough demand? 

Now, all of us want to get a good deal, but it isn't good business when you don't have the perception that people are getting a good deal, because so much of it falls in the world of perception. And if I go out there and put giant banners that I've got a big price reduction just to fill that last little bit, that doesn't seem to make a whole lot of logical sense. Also, don't forget that if I go fill in those vacant units with a low cost customer, think how hard, how difficult will be to raise them up. If my target is $150 a month of rent for a 10 x 10 unit, and I bring somebody in, now it may be $70 or $80 to try and get it full. How hard will it be for me to raise that person up almost double going forward? Then the answer is very, very difficult. And if I'd had a little bit less occupancy, but every single new person I brought in, was it full market rent? 

Well, in that case, everyone I fill at full market would be worth two at the reduced price. So what I've done is now I've created an environment in pricing where I've spooked my existing customers with that low price, and I really haven't benefited much. The bottom line to it all this, do not be afraid to have some degree of vacancy, as you find the correct mix, as you find your balancing point. If you're buying a property that's got a lot of vacancy through poor management by the mom-and-pop, don't panic and think you have to fill all of that overnight, it's probably better to go at a more moderate speed to try and make good decisions based on what's best for the overall business. Don't think you must rush to be full because there's no brownie points in being full. These are income properties.

What the bank wants to see is you've maximized the income, and that's a mixture of both rent and occupancy. The bank will be far more impressed if you have a higher net income at 95% occupancy than if you're simply at 100% occupancy, but actually have a lower net income. So never forget that inverse relationship that exists between rents and occupancy. If you play your cards correctly, if you are not afraid to have some degree of occupancy vacancy as you find your way forward in the proper mix. If you think about the fact that everything you do will have some other form of implication, then you can be a smarter manager and a more profitable owner. This is Frank Rolfe with The Self Storage University Podcast. Hope you enjoyed this. Talk to you again soon.