No matter where you go, who you talk to or what industry event you attend, self-storage conversations always seem to wind their way around to facility occupancy. Like two kids comparing how many Transformers they have, this is how we operators nonchalantly measure our businesses against each other, even if we do it subconsciously.
There’s nothing wrong with this. In fact, it helps us maintain balance and gives us validation that we’re keeping pace with the rest of the market—that someone outside our operation doesn’t know something we don’t. It’s just natural to compare.
Most of these discussions revolve around physical occupancy. While this is a great measurement, it only tells a piece of the story. In reality, square-footage occupancy and economic occupancy reveal as much, or more, about the overall health of a facility. Let’s take a closer look at all three occupancy types.
Physical Occupancy
Physical occupancy is determined by dividing the number of actual units rented by the total number of units at your facility. For example, if you have two units at your facility and rent one, congratulations, you now have a physical occupancy of 50 percent.
This is the number most people in the industry like to discuss. As a measurement, it gives you a 50,000-foot view of your self-storage operation. It can help you see which unit sizes are renting faster and which may need to be adjusted. It can also help you determine if you need to build more storage space and, if so, how many more of each unit size you need. Finally, it gives you insight to the overall demand for self-storage in your market.
What physical occupancy can’t do is tell you if you’re managing a facility with economic efficiency. At the end of the day, this measurement is a bit like the cubic zirconia of self-storage statistics. It looks and feels like a real diamond—and people will try to sell it to you as if it’s a real diamond—but in the end, it may not hold up to close scrutiny.
Square-Footage Occupancy
The second type of occupancy provides insight to rented square feet. To figure out the percentage, take the amount of actual square footage rented and divide it by the total amount of rentable square feet available at your facility.
Although this isn’t the occupancy number everyone wants to discuss, it can tell us if smaller or larger units are in demand for a particular market. For example, if you had a month in which your net unit rentals were zero, your physical occupancy percentage wouldn’t change, but your square-footage occupancy could go up or down depending on which size units were rented that month.
To do the math, let’s assume your facility has a total of 350 rentable square feet, which includes two 10-by-10 units and one 10-by-15. At the beginning of the month, one 10-by-10 and the 10-by-15 are rented for a total of 250 square feet, or 71 percent square-footage occupancy. By the end of the same month, let’s say the customer in your 10-by-15 has moved out and a new customer has moved into your available 10-by-10. This gives you two 10-by-10 units rented or a total of 200 square feet.
While your physical occupancy is still 66 percent because you had one move-in and one move-out for a net of zero unit rentals, your square-footage occupancy has declined because your total square footage rented decreased from 250 square feet to 200 square feet. This means your square-footage occupancy fell from 71 percent to 57 percent. If you keep an eye on it, square-footage occupancy can help when reviewing rental trends.
Economic Occupancy
Economic occupancy looks at rent figures and is the best indicator of your self-storage facility’s health. To determine this number, divide the total rent everyone is paying at your facility by the total potential rent, i.e., the amount of rent you would collect if every unit was full and paying at full price. For example, if your facility’s potential rent is $10,000 but your actual rent is $5,000, your economic occupancy is 50 percent. This is the percentage of total revenue your facility can generate.
Economic occupancy is the only measurement that can go over 100 percent. Consider this:
- Your facility comprises one 10-by-10 unit that is occupied and rents for $100. In this scenario, you’re 100 percent occupied across all three occupancy metrics.
- Let’s say you discount the same 10-by-10 unit to $90. How does this affect your occupancy? Well, physically and by square footage you’re still at 100 percent, but economically, you’re now at 90 percent. This is because discounting the unit changed your actual rent. Instead of charging the full price of $100, you’re collecting $90, or 90 percent of the potential value.
- Now let’s say you find a new customer who’s willing to pay $110 for the same 10-by-10. In this scenario, your economic occupancy would exceed 100 percent because you’d be collecting $110 on a price value of $100, or 110 percent of the potential value.
Economic occupancy is important because it shows how close your facility is to renting units at market rate, which is what drives revenue—the one number everyone really cares about. This is why physical occupancy isn’t the final say on how well you’re managing your facility. If you rented all of your units for free, your physical and square-footage occupancies would be amazing, but your economic occupancy would be 0 percent. Your customers might be happy, but anyone who provides goods and services to your facility and expects to be paid would be quite irritated.
Typically, all three occupancy figures will be within a few percentage points of each other. There are a number of self-storage managers, owners and investors who erroneously believe the most important goal for a facility is to reach 100 percent physical occupancy. In actuality, you never want to be 100 percent physically occupied because, at that point, you’d be turning away customers, which is never a good idea.
Revenue management is the key to solving this issue. If your facility is full, then raise rates because the demand in your market is high. This is a great situation to be in, so take advantage of it.
There’s no gold star for attaining 100 percent physical occupancy. In all honesty, no one cares. Remember, the revenue you can generate from your facility is a much better indicator of your facility’s health than the number of units you’ve rented. The price at which you rent units drives the financial viability of your facility. All three occupancy measurements are important, but don’t weigh physical occupancy too high.
Matthew Van Horn is vice president of Cutting Edge Self Storage Management, which specializes in facility management, feasibility studies, consulting and joint ventures. He’s also president of 3 Mile Domination, a full-service self-storage marketing and strategy company. For more information, visit www.cuttingedgeselfstorage.com and www.3miledomination.com, where you can download a free e-book.
