The success of any business is a matter of economics.
Simply put, it comes down to income versus expenses. As long as there is more money coming in than there is going out, one can stay in business and hopefully prosper.
While self-storage, like any other business venture, must adhere to this same economic formula, there are differences peculiar to our business that need to be understood in order to succeed. Sure, like any other real estate developer, the self-storage owner is concerned with financing, land availability and acquisition, construction and materials, customer profiling, marketing and competition. But the successful owner must also be aware of every opportunity to be profitable.
Efficient use of land.
Assuming the owner has done his/her homework, has gotten all the correct information from an analysis of the market, and has located the facility in the right place, next comes determining the most efficient use of the land in terms of site layout. The proper positioning of buildings on the site can be critical to the owner's profitability and success. Poor site layout planning will result in fewer leasable units. A competent manufacturer's sales consultant can be of great value in this area because of their experience which can complement traditional thinking.
The importance of unit mix.
And speaking of leasable units, the proper mix of unit sizes is one of the most important factors in determining whether a facility will prosper or lanquish. After all, if an owner knows who his customers are and understands their storage needs, occupany rates will stay high under normal market conditions.
That said, unit mix can sometimes be one of those areas of profitability that can stand improvement. Obviously, no one has a crystal ball that can predict the perfect unit mix, particularly for a new facility. Predictably, if an owner's occupancy rate is good, he may think he has the problem solved. But there is a more finite opportunity to increase profitability, particularly when the owner plans an addition to an existing facility, because there is already knowledge of market needs and limitations, thanks to the original market analysis.
When determining the unit mix for an addition, there are three factors to be considered:
- Maximizing the occupancy rate.
- Maximizing total square footage
- Maximizing rent per square foot.
Occupancy rate and total square footage are important, but what good are they if rent per square foot is too low?
Why rent per square foot is as important as occupancy rates.
When discussing unit mix for an addition with an owner, I detect a good deal of confidence being placed in the facility manager regarding unit mix decisions. Quite often the owner will ask the manager, "What do you think we need to build?" Of course, managers welcome this question because their bonuses and incentives are sometimes tied directly to occupancy rates, plus higher occupancy rates will bring personal praise from owners.
There is no question that occupancy rates are important and certainly make everyone involved feel positive, but there may be something else missing in the equation that is equally as important.
Wouldn't the owner be more profitable if he/she could increase the number of units getting higher rent per square foot?
Often, facility managers will suggest adding larger unit sizes, e.g., 10X20s, 10X25s, and 10X30s, concluding that these units get a higher rent, and are therefore more profitable.
Too often, managers put occupancy rates as their first priority since this tends to be the benchmark by which most successful facilities are judged. Just because a facility is 100% full doesn't mean it is as profitable as it should be. I suggest, that while measuring occupancy rate is a good formula, it can be better, particularly in the long term.
Consider Smaller Units.
For example, if prospective tenants for small units are being turned away in favor of those requesting larger units, the manager has not only lost their rent, but they would have paid a higher rent per square foot than the tenant leasing the larger unit. Certainly,
if the manager has done his/her homework and understands the unit mix needed in his market (demand) and has those units available (supply), the formula is working. But it isn't the only factor that should be considered when determing the proper unit mix. By decreasing the unit sizes, the manager or owner can increase rental income per square foot and as a result, increase net operating income.
Another advantage of smaller units is this: Let's say a customer requests a 10' X 20' unit but there are none available. If the manager has smaller units in the inventory, he or she can offer the customer two 10' X 10' units for the same price of the 10' X 20.'
It's true that some markets may not need the smaller units right away, but the difference in the rent per square foot may make up for the temporary lower occupancy rate in the short term.
My suggestion to include smaller units in the mix is not intended to negate conventional unit mix planning that puts the owners in a situation of having units they can't rent in the short term, but it should be viewed as another method of increasing net operating income long term.
In fact, I think there is wisdom in a quote I recently read from Mike Parham, which said, "The goal of your unit mix should be to maximize the financial return based on a realistic composition of a unit mix that will consistently lease and maintain reasonable occupancy. In other words, although you may charge higher rates per square foot for smaller units, you do not want excess units that you cannot lease."
In the final anaysis, a good unit mix should take into consideration the needs of the market, but also maximize the revenues of the facility. But, in looking at the bigger picture, there are several factors that impact success in the self-storage business. Unit mix is just one consideration.
After all, the ability of any self-storage facility to experience sustained growth and profitability should be the goal of ever manager, owner and investor alike. Doesn't it make sense to use every tool at your disposal?
Mike Gillikin is a Sales Consultant for BETCO, Inc. the premier single-source manufacturer of metal self-storage buildings and all-steel components.
Visit BETCO on the Web at www.BetcoBuildings.com
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