In today’s self-storage industry, one of the biggest challenges we have today as small self-storage entrepreneurs is the rising disconnect between the rates quoted by Real Estate Investment Trusts (REITs) and the actual rental prices in the market, including their own effective rental rates.
This widening gap is not just a matter of numbers; it’s a dilemma that impacts how our facilities and projects are being underwritten, how our loans are approved, and how consumers perceive the value of the service they are paying for.
The Disconnect Unveiled
Traditionally, feasibility reports and bank proformas have heavily relied on data sourced from websites, particularly REIT sites, to determine market trends and rental rates.
However, in areas saturated with REITs, this data often paints an inaccurate picture.
REITs employ algorithms that crunch numbers from various sources, leading to drastic discounts on street rents. These discounts can range from 30% to a staggering 100% within the first year of occupancy.
Take, for example, Union Realtime’s recent October 2023 report, indicating an average rental rate per square foot in the US at $1.20, a 22.47% decline from October 2022.
This data might suggest a significant industry-wide decline in rental rates.
However, a closer look reveals the disconnect. During a recent earnings call, CubeSmart’s CFO, Tim Martin, disclosed that while effective rates to new customers dropped by 18%, in-store revenue rose by 2.3% in the third quarter and a 4.5% year-to-date overall revenue increase.
The Challenge and Some Potential Solutions
The challenge posed by these artificially low rates is that consumers are naturally drawn to them, unaware of the potential increases that await them.
To counter this trend, education becomes important. I am afraid that may be our job. One way to do it is in our marketing.
- Marketing Strategies: Small operators can employ targeted marketing campaigns to address the issue directly. Ads emphasizing the stability of rates, such as “Tired of Your Price Increases?” coupled with offers to lock rental rates for extended periods, can attract consumers looking for transparency and reliability in pricing.
We have targeted people who have visited REIT sites in certain trade areas with specific ads for them before.
- Managerial Expertise: Frontline staff, the facility managers, can play a pivotal role in educating potential customers.
Training them to field inquiries effectively and highlight the shortcomings of competitors’ pricing strategies can sway potential renters toward non-REIT options.
- Educating Lenders: We must proactively engage with lenders, presenting comprehensive analyses showcasing the difference between REIT and non-REIT properties.
Sharing earnings reports and having candid conversations about the market reality can help lenders make more informed decisions. This doesn’t always work, but I have had them focus more on non-REIT web rental rates and use them in their income calculations.
Conclusion
By acknowledging and understanding the existing disconnect between REIT rates and actual rentals and implementing targeted strategies, as small operators, we have the right conversations with the right people in order to navigate this challenge successfully.
It’s not just about competing on price; it’s about the value of our assets, stability in the industry, and integrity of what we offer the public.
Have you dealt with this issue in your self-storage business? Share your experiences and strategies in the comments below.
