Ways to add value to an underperforming self-storage asset

The market for acquiring self-storage is more competitive than ever, with prices and capitalization rates at record highs. For the investor looking to grab their slice of the pie, a smart strategy may be to sniff out less than stellar assets. If you can add value to an underperforming property, it may allow you to access a market that you could not otherwise afford. It can also make a difference in your decision to invest, helping you earn an acceptable return.

Additional real estate value can come from many sources, especially in an industry like self-storage where each installation is a real estate asset but also an operating activity with cash flows. Here are some strategies to consider for your new acquisitions and your existing properties.

Rent increases

One of the quickest and easiest ways to positively impact self-storage business revenue is to increase rental rates. Many facility operators are reluctant to raise rents and most do not do so regularly. As a result, their prices can be 20 to 30% lower than the market average. There’s a reason real estate investment trusts and large third-party management companies are so successful: rate management has become a science! But it takes discipline and in-depth knowledge of the market.

In the attached chart you will see how adding a small amount of rent to each square foot per month has a huge impact on revenue and facility value. Rising rents can lead to a short-term increase in vacancy, but the number of tenants leaving is usually minimal, usually much lower than operators assume. Don’t be afraid to raise rents. Your competition is doing the same!







Effect of rent Increased installation by 40,000 SF

Assumption: 5% ceiling rate

Monthly increase

$.05/PC

$.10/PC

$.20/PC

$.30/PC

Annual increase

$24,000

$48,000

$96,000

$144,000

Increase in
installation value

$480,000

$960,000

$1,920.00

$2,880.00

Unit mix adjustments

When a self-storage facility is built, the developer and owner make assumptions about what the market wants in terms of space (hopefully based on extensive research). However, consumer demand and market needs may change over time. If your new property is experiencing higher than average vacancy rates in certain sizes or unit types, an adjustment may be required.

Generally, combining smaller units to make larger ones and vice versa isn’t too complicated or expensive, but check with your build supplier. Additionally, you might consider adding small lockers in indoor locations or portable storage units to replace parking or excess land where permanent construction is not viable.

Automating

More and more self-storage operators are considering full or partial automation of facilities as a way to streamline the business and generate more revenue. For example, you can consider adding self-service kiosks, online rentals, automatic payment features, automated access control, and other popular innovations that can help you reduce office hours and even staff time.

Eliminating payroll has a similar level of benefit to increasing rents. At a cap rate of 5%, a cost reduction of $48,000 per year will increase the market value of a facility by $960,000. The combination of aggressive rate management and facility automation can dramatically increase property value.

Solar energy

Adding the ability to generate solar power is not only the “right” thing to do, it will almost always be a cost-effective addition to a self-storage facility. In most cases, using solar panels will offset your utility costs. You might even generate excess power that you can sell back to the utility through a power purchase agreement. You can also consider adding backup battery systems that store your solar power for nighttime use.

Assuming a monthly savings of $400 and recycling our 5% cap rate above, the potential increase in the value of the installation is $96,000. With the average solar panel system costing between $30,000 and $40,000, this is an immediate payoff that will boost your bottom line for years to come.

Auxiliary sales

One of the best ways to increase the performance of self-service storage facilities is to add new revenue streams. Selling staples like locks, boxes, and other moving supplies can help you gradually increase your profits and customer satisfaction, but there are plenty of other accessories you can consider. For example, some operators sell ice, propane, camping supplies and more, which is especially useful for their boat/RV storage customers.

Of course, boat/RV storage is a great extra profit center on its own! Don’t forget wine storage, record storage, fine art storage, truck rentals…the list goes on.

Two popular offerings that can generate decent extra income in self-storage are renters insurance and renters protection plans. Institutional traders report significant profits on the sale of these products. Typically, margins range from 50% to 80% depending on the provider and revenue share model, which can translate to $4 to $6 per tenant per month. The average adoption rate is 80%, although it could be much higher. It really depends on how the offer is presented to the customer at the time of rental.

The attached chart shows an example of how you can increase the value of self-storage with these programs. They can be extremely profitable if they are an integral part of your rental process. (As in the table above, we assume a cap rate of 5%).






Number
of units

Adoption rate

Profit per tenant per month

Revenue added per year

Increase in the value of the installation

400

80%

$5

$19,200

$384,000

600

80%

$5

$28,800

$576,000

curb appeal

Finally, don’t underestimate the value of basic site appeal and upkeep. Tenants are generally more comfortable in a property that feels safe. A clean, well-lit, and welcoming self-storage facility will drive more traffic and consistently charge you a premium. So be proud of your establishment and the rewards will come.

As you can see, there are many ways to add value to a self-storage operation—important value in many cases. When you hear of investors buying facilities at low cap rates with high prices, they typically see a property that offers benefits through many of the above strategies.

Tom de Jong is Senior Vice President of Investments for Colliers Self Storage Group, which specializes in the acquisition, disposition and financing of self-storage facilities nationwide. He has worked with self-storage buyers, sellers and developers for 14 years. To reach him, call 408.282.3829 or send an email [email protected].

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