Aggressive Rate Hikes Part 1: How These Strategies Can Harm The Self-Storage Industry

The self storage industry is in a precarious position and it all has to do with pricing and perception.

A recent Yardi Matrix report states that slowed demand for self storage continues to drive street rates lower. “Elevated residential mortgage rates have slowed home sales, reducing population mobility, a major driver of storage demand,” the report reads. “As a result, storage operators continue to lower asking rates to drive new rental demand.”

Of course, knowing that today a majority of people do an online search before walking into a facility, it appears that REITs are adopting a new pricing strategy: Lowering web rates, which were already typically lower than street rates. That would be fine if it were an honest move, however these low web rates are often followed by dramatic increases just a few months down the road.

The logic behind this seems to be that they can grow revenue by lowering web rates, getting people in the door and then raising rates aggressively. After all, most tenants tend to stay in a facility for 10 months or longer; so even if a facility misses out on some revenue in the first couple of months, they make up for it on the back end.

Unfortunately, a lack of transparency about rate increases is not a good look for the self storage industry. Sure, REITs have often offered low entry pricing – think the $1 move-in Public Storage is famous for – but any reasonable person understands that type of pricing to be a simple promotional rate that won’t last beyond the initial month or two. 

On the other hand, luring someone in with what may seem like a reasonable rate to them – say a 10x10 for $80 – only to double or in some cases triple that price in three months can leave a lot of people feeling like they have been duped, taken advantage of, screwed over – you name it.

The other unfortunate outcome of this pricing strategy is that independents (the rest of the industry) are being forced to follow suit in order to compete. I’m going through this with one of my stores right now (and will share that data in a follow up story). Currently, we are lowering their web rates to match a nearby REIT, and while it seems to be working, no one is happy about it. It’s hard to feel good about acquiring a new tenant and then raising their rate 200%.

There are other downsides to these pricing strategies. In his post Hidden Changes in Self Storage Rents, Cory Sylvester with DXD Capital points out that these pricing strategies can mislead a developer in analysis, causing an underestimation of achieved rental rates in underwriting. “Since the web rates are more like teaser rates that change aggressively after three or six months, [they’re] much less representative of what we can achieve if we build a new store and start leasing it up,” he writes.

I see another consequence to this strategy which may be even worse. In my mind, tactics that hide behind a lack of transparency push us closer to 1) increased government regulation, leading to rent control, or 2) consumer litigation claims, which again leads to increased government regulation and a whole heap of bad press.

One way to combat consumer outrage, and a tactic I think it worth considering, is in addition to signing a lease, require tenants to also sign an introductory rate addendum. This form states that they understand the low rate they’re paying today is introductory, and that it is likely to will increase in the coming months. It’s a CYA move, but no one can say they weren’t warned.

We talk a lot about perception in the self storage industry. We are constantly battling zoning boards and city officials, trying to get them to understand the benefits of self storage within their communities. But if the perception that operators regularly dupe consumers through rate hikes becomes a full-blown reality, we may have an even tougher road ahead.

—

Travis Morrow is the President of National Self Storage. This article is part one in a series.

Part 2: Aggressive Rate Hikes: We Tried It. Here's What Happened.