Before my partner and I created our self-storage company and sought to acquire our first facilities, we poured over industry data, attended tradeshows, examined local markets and analyzed potential competition. My simple theory was self-storage isn’t a real estate asset; it’s a business. That's what attracted us to it. We believed there was an opportunity based on that core principle.
We learned many people get into self-storage to create passive income from the real estate, not realizing they’re missing 50 percent of the opportunity. We believed we could purchase a decent piece of real estate, even if it was underperforming, and resuscitate the business aspects. This became our working strategy.
Of course, it was harder than it sounded; but I knew if the theory proved true, our efforts would be rewarded. Could the financial performance of a real estate asset be greatly improved through a change in operation, marketing and management? In this industry, yes! Self-storage performs similarly to retail. You have a store in which you sell products. Customers come in and out daily and have unique needs and circumstances. In the markets we studied, most of the product didn’t meet the needs of the client base. The customers had changed, but the businesses hadn’t.
As we looked more closely at the industry, our focus was on the customer, product and competition. We liked what we saw.
The Issue of Occupancy
In the beginning of our journey, my partner and I didn’t focus on things like occupancy or price per square foot. I know, I know … How can you get started in real estate without considering those things? Remember, we were building a business not investing in a real estate asset.
Too often, owners and managers look at square-footage (physical) occupancy as a gauge of facility success. The higher the occupancy, the better the facility is performing. But this can be very deceiving. After all, the goal shouldn’t be to have high occupancy but to achieve high revenue. It’s not that physical occupancy should be ignored. It can be a great benchmark across a market to indicate its overall health. If there’s widespread low occupancy, that’s a pretty clear indicator of oversupply. That said, we were focused on other factors.
Room to Improve
None of our potential acquisitions were similar in terms of traditional real estate metrics. Some were at 60 percent or lower occupancy, while others were at 100 percent. Some were selling for twice as much per square foot than others. Population and demographics where all unique. The facilities were even built differently. Not that those things weren’t important, but they weren’t the determining factors in our purchase decisions. So, what were we looking for?
We wanted to find storage properties that were underperforming in strategy, revenue, operation and customer experience. We looked for facilities that could be turned around, focusing on opportunities to increase revenue and force appreciation. Some of the sites we purchased had zero upside potential in occupancy because they were supposedly “maxed out”; but they had huge upsides in revenue through rate increases, collections, add-on products and services, and marketing.
Not all storage facilities are created equal, and neither are their customers. We didn’t want to convert every prospect who came through the door. We wanted tenants who were looking for quality, security and amazing service. By changing the customer experience, we looked to bring more value.
We also looked at profit per customer. The spread between cost of acquisition (how much you spend to get the customer in the door) and the lifetime value of the customer (the average monthly rent for the facility times the average length of stay), will tell you how much each customer is really worth. Then the questions to ask are: Can I lower the cost of acquisition? Can I increase the customer’s lifetime value? Can I lower our fixed and variable costs to increase profit per customer? These are the metrics on which we’re focused.
Finally, it’s important to note that each facility has varying demand for different unit sizes. We understood that these should be analyzed and priced separately. Rates should be looked at from size to size and customer to customer. This can be a great tool to maximize revenue and increase the lifetime value per customer. One unit size doesn’t fit all and neither does price.
Seek Potential
With the above strategy in mind, we could pinpoint acquisitions that met our criteria. We mined second-tier markets with lots of demand but subpar self-storage businesses where we could bring the most value to customers. We looked for poorly operated facilities that had lost control of their collections or expenses, were giving away unnecessary discounts, or were waiving fees. In all cases, these businesses were losing revenue, which can have a huge impact on the bottom line.
When evaluating self-storage properties in which to invest, occupancy shouldn't be overlooked, but it shouldn’t be your primary focus. Look at room to improve and revenue potential, and you’ll find a business that can be lead to great success.
AJ Osborne has more than 15 years of experience in the self-storage industry. In 2012, he co-founded Bitterroot Holdings, a privately held company that owns and operates Keylock Storage as well as fitness centers. Keylock has 10 locations across the Northwest, with plans to acquire or develop five more within the next five years. For more information, visit www.bitterrootholdings.com.
