Bringing self-storage rents to market rate...How?

Question

Just acquired a very underperforming self-storage facility in Los Angeles area.  Rents are way below market.  On average 40-50% below market.  What's the best way to bring things up?  All at once?  In increments?  And is there a good communication strategy to tenants?  Any thoughts welcome.  Thanks in advance.

Jonathan G. · Answer

@John Kim

Start leasing empty units at what you and management company feel is the market rate and if things start leasing quickly ,bring others up as their contracts expire / come up for renewal.  This way you’re absolutely sure your market rate analysis is accurate before you alienate 50% of your long-term core business.

Lance Langenhoven · Answer

@John Kim I had a similar situation at a boat & rv facility I purchased Jan. 2016. The rates were as far below market as you say yours are. Right off the bat we first fixed up a bunch of stuff.... added a gate with key-pad access control. Asphalted the entrance driveway, set up a proper management system, added cameras, etc.

Six months after the purchase we raised all the rents about 50%. Nobody moved out as we were still the lowest priced in the area.... they couldn't go anywhere unless they wanted to pay even more!

Now, every year we review the rents and set new rates for all the spaces. The vacant spaces get upgraded to the new rates immediately but existing tenants stay at their existing rates. Every two or three years we catch everyone back up to the market rate so nobody gets to be too far behind.

We always try to notify everybody about any big change coming well in advance of the change. We typically try to make changes 1st of every year so we'll start notifying them in October and remind them again in November & December. That way nobody can say we didn't tell them about the change.

Charles Kao · Answer

@John Kim

We do 1/4 of facility at time with prices to market or very close.  Letter that goes out that is automated is along lines of but a little bit cleaner wording:

Dear [customer]

Thank for being a loyal customer of [storage facility] since [move in date].  Currently the market rate for your size unit is [market rate] and we currently have a waiting list.  While we have to raise the rents on your unit we wanted to reward your for your loyalty by offering you a discounted rate of [new storage rate]. This new rent will take effect on your [next billing date more than 30 days out].  If you wish to stay you need not do anything.  We hate to see you go but if you do decide to we hope the extended noticed provides more than enough time to make other arrangements.  Thanks in advance

Storage Facility Staff

Zach Quick · Answer

@John Kim rip the band-aid off ASAP. Especially if you are filling up at street rates on your vacant units.

Better to have people angry once than two or three times trying to eventually get them to market.

Peter Lee · Answer

Oh also to give more insight, the self storage facility is in one of the more affluent cities in LA County.  Quite a few tenants who have been there several years.

Faith Hill · Answer

@John Kim Congrats on your recent acquisition! We took an incremental approach very similar to @Lance Langenhoven.  Since we are in a market that has very low household income (the lowest in the state), we wanted to be sensitive to the demographics of our customer base.

We first made obvious improvements to the facility - added an automatic gate, cameras, new website - and then we started tackling rent raises on units that were the furthest below market rate and/or the oldest tenants.  We sent a rent increase letter to our customers in advance highlighting the improvements we made to the property.  We saw very few move-outs as we were still the most affordable in our market.

We still review every 6 months and tag units for rent raises accordingly.  The ultimate goal is to eventually start using our management software to automate annual rent increases.

John Lenhart · Answer

We took over a property about 2 years back and have been working on raising to market. We did not necessarily rip the band aid off but we pushed aggressive rent increases. we staggered them over a 3-4 month period where we hit 1/4 of the tenants each month. This way, if there was an unexpected spike in vacancy we could toggle back a bit to keep revenues from dipping. It did not happen, but it is an approach to use in case you are worried about a large loss in tenants

Peter Lee · Answer

Hi Zach yes we do.  I'm sure when we let her know she will definitely prefer the all at once method!  We will have a discussion with the management and on site to get a feel on what the best route is.  Either way the management company is incentivized to see rents go up as it increases their fees.

Zach Quick · Answer

@John Kim you have on-site manager? They will likely appreciate the just all at once method as opposed to dragging it out. However, I’ve done it both ways as well.

Mike McCarthy · Answer

I don’t manage units, but as a renter of one, I know around here rates get increased $5-10 every quarter or so. My understanding is that most people with storage units aren’t going to go through the hassle of moving for $10, especially if the nearby units are similarly priced.

Not sure how long it would take to get to market rent, but it might be a way that many of your renters might hardly even notice.

Bringing self-storage rents to market rate...How?

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