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Self Storage Industry's Hidden Profits

Self Storage Industry's Hidden Profits

Here are two facts about the state of the self storage industry compared to this time last year:

  1. Facility occupancies are down 1-2%.
  2. Starting rental rates for new customers are 15% lower.

If you had to guess, based on those two factors, whether storage companies are making more or less money than last year, what would you say?

Most would say, less.

The reality? 

Operators are making more this year than last year. 

Extra Space Storage and Public Storage grew same-store revenue by 2.7% and 6%, respectively in Q2.

But how is this possible when same-storage occupancy was lower in Q2 2023 vs Q2 2022 and advertised ‘web-rates’ are ~15% lower on average than last year?

Newsletter Graphs_YoY Occupancy Declines Q2

Newsletter Graphs_ExtraSpace Strategy

 
ECRIs Drive Overall Revenue Growth by up to 40%

The answer has to do with the most powerful and most overlooked aspect of the self storage revenue model: existing customer rent increases (ECRIs).

Simply put, customers are seeing a rent increase every 6-9 months, and they can be sizable. Our data indicates ECRIs range from 10-40% depending on the customer’s starting rate. 

Combine that with the fact that customers tend to move in and stay put—61% stay for 12 months and 46% stay for 2 years—and you’re left with a large group of customers that move in, generally don’t move out, and see their rents increase year after year. This is the underlying force of what drives revenues higher even when starting rents decline.

09 Newsletter Graphs

The chart below is illustrative in nature and roughly illustrates the dynamic at play. Even as rental rates drop 10%, revenue only drops 1.6% over a three month period and ultimately rebounds, ending the year 4% higher.

Newsletter Graphs_Raising Rents Offset Declines-1

 

So why does this matter? 

Historically, this dynamic of a low introductory ‘teaser’ rate quickly followed by aggressive price increases was not as pronounced. 

Now, the data indicates that the REITs are doubling down on this pricing strategy (more on this next week).

Ultimately, for industry watchers like ourselves, the ‘teaser’ market rate that we all see on the internet doesn’t really tell us what tenants are paying and it does not provide us as developers the correct baseline for projecting possible returns on new facilities.

The good news is that this dynamic is largely lost on developers today, which means fewer facilities will be built. Those of us who stay in the market now will already be exercising this pricing strategy on existing facilities when other developers are getting back in the game years behind.

The bad news is that most market commentary you read will speak only about the ‘teaser’ rate and give an inaccurate description about the current market conditions.

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