Publication VI

By Michael McCune
Argus Self Storage Sales Network

What’s Happening to Rental Rates?
It’s not what you thought -- and it’s not good news!!!
Our good friends at Mini Storage Messenger annually review rental rates and occupancies around the country. I have taken some time to study these reports and found some trends that I feel merit some thought by all owners. My office has pumped these statistics through our computer and made some comparisons that I think are quite enlightening, if not disturbing.

The first chart shows the growth in rental rates and inflation during the 1990’s. The chart dramatically shows that inflation grew at a rate almost 5 times faster than the rental rates for 10x10 and 20x10 units and 2.3 times faster than the rental rates on the smaller 10x5 units.

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The second chart shows the trend of vacancy rates over the same period. In the early years of this survey the spike in vacancy rates is roughly matched by a slight decrease in rental rates which would generally correspond to our intuition. A more puzzling phenomenon occurs in the mid 1990’s. Vacancy rates fall, but the rental rates remain relatively flat when one would normally expect them to shoot up because of decreased supply and a very strong economy.

vacancrt.gif (8235 bytes)

Without dizzying you with too much detail, I can report that I have run a hypothetical proforma and found that if one increases the rents as indicated in the survey and the expenses are inflated by the CPI (expenses were estimated to be 25% of original rents), the result is that the unleveraged NOI actually drops over the period. Clearly, something is keeping the lid on rental rates! After talking with several people in the industry, three general theories have emerged. The arguments are briefly presented below -- you be the judge!

OVERBUILDING
Additional supply of product is the classical reason for sluggishness in rental rates and there is surely some overbuilding going on in select markets in the last couple of years. However, that wouldn’t account for the lack of increases prior to about 1995, since the development boom did not really get underway until later.

GLASS CEILING
Some people suggested that there may be a glass ceiling on rents because consumers are willing to pay only so much before they think of alternatives. As evidence they point to the extreme flatness of the rental rates over the period in the large unit sizes where the dollar amounts are more significant and therefore less discretionary. Also suggested by the group was that the small rise in medial household income over the same period (1.5% annually) may have increased the pressure on achievable rental rates. The actual correlation of rental rate increases and the increase in household income is quite interesting in itself.

LAZY MANAGERS
There is one school of thought that suggests owners and managers were simply not as aggressive as they should have been when it came to raising rents. This is a great theory in that it implies there are large rental rate increases to be reaped in the future. However, it is improbable that this entrepreneurial group would be guilty of such an oversight. Although it is difficult to know the exact cause of the limited rental increases, one thing is readily apparent -- with rental rates being one of the most significant elements of our business, they constantly need to be watched and studied.

Give your local ASSSN affiliate a call to discuss these trends in rental rates and see how you might be able to maximize your profits.