Storage companies have new ways to calibrate rental rates

CHICAGO—Storage companies have begun attracting more interest lately, and some say real estate investors should consider these properties on par with vital sectors like medical office buildings or student housing. And at REITWeek 2013: NAREIT‘s Investor Forum, held this week in Chicago, officials from Public Storage Inc., the nation’s largest self-storage firm, explained some of the key reasons for their sector’s strength.

Every year, for example, between February and August, most storage firms send out rental increases, usually a few percentage points, to long-term customers. But John Reyes, Public Storage’s chief financial officer, told conference-goers that this year they were hitting customers with rental increases of up to 8.5 percent.

“Historically, this is very aggressive,” he said. Furthermore, it seems like customers have stuck with Public Storage without much complaint. “We’ve seen that if they get a 3 percent increase, or an 8 percent increase,” roughly the same number stay in a Public Storage facility and keep paying the bill. “That’s pretty encouraging for us. So, naturally, we’ve migrated to the 8.5 percent.”        

The historic boost in rental income has had an impact. Public Storage, which has over 2,000 locations in the U.S. and Western Europe, recently posted a revenue increase of 5.4% over last year’s first quarter. Meanwhile, same-store net operating income grew by 9.5% and occupancy ticked up from 90.8% to 92.4%.

“The management for these facilities has gotten so much more sophisticated,” said Marc A. Boorstein, a principal of MJ Partners Real Estate Services, a firm that studies the self-storage market. After years of analysis and testing, self-storage operators like Public Storage discovered how to properly calibrate raising their tenants’ rent over time and still keep their business, he said. The technique, now widely-adopted, practically ensures profitable operations. “That’s probably the biggest secret in the industry.”

Reyes confirmed this for conference-goers. “This isn’t something where we woke up one day and said ‘let’s do this,’” he said. And although a healthier economy played a minor role in deciding how much of an increase to impose, a more important factor was that “we have much more understanding of the demographics of our customers.” The company tested various strategies out in many different markets with different types of customers before deciding on a formula. “And we will continue to test different things as we go forward,” Reyes said.