James McLean

By Erica Shatzer

or nearly a year now, the “hot talk of the town” has been the new pricing strategy employed by the REITs, according to James McLean, a market analyst for New York City-based Union Realtime, the developer of Radius+, a comprehensive site selection and location intelligence platform for self-storage and a data provider for MSM’s annual Self-Storage Almanac. The strategy, in case you haven’t heard, involves advertising rock-bottom “teaser” rates on their websites to attract customers and then significantly increasing their rates—by 50 percent or more—as soon as three months into their tenancy.

“It’s effective,” he says about the pricing strategy’s ability to bring in new customers. “Their occupancies are doing well. But is it a long-term strategy? Is it the new norm?”

Given its potential to disrupt the asset class in several ways, it’s not surprising that it remains a topic of discussion amongst industry professionals. Therefore, in this edition of “Who’s Who In Self Storage,” McLean outlines the potential perils of the REITs using this approach to pricing for an extended period of time.

Unfortunately for owner-operators with facilities in markets where REITs have a presence, the REITs’ extremely low “teaser” rates attract customers who surf the web in search of self-storage. Whether frugal in nature or attempting to fight inflation, most consumers do not want to spend more than necessary for what they believe to be essentially the same commodity. This means, to stay in the game and to not lose market share, non-REIT owner-operators are forced to follow suit. They match the REITs’ low introductory rates to remain competitive, even though it’s not beneficial to any site’s economic occupancy.

“It’s a loss leader the first month,” McLean says about the heavily discounted move-in rate. “Small operators don’t or may not have the resources to do it. They aren’t going to get the same results because they aren’t playing with the same deck of cards.”

He goes on to say that smaller operators may “need to consolidate or share resources” if they find themselves in direct competition with a facility owned or managed by a REIT.

Instead of perpetuating the slippery slope of matching the lowest rates in the market, McLean encourages owner-operators and property managers to “sell something other than price.” Exceptional customer service, an easily accessible location, and amenities such as 24-hour access, drive-up access to units, climate-control options, and high-tech security features are some of the numerous selling points that could be touted to garner higher rents. As a matter of fact, according to the SSA’s 2023 Self Storage Demand Study, tenants are willing to pay extra for all those features and many others.

Otherwise, McLean offers one exception to the REITs’ pricing strategy that may generate a sigh of relief for some independent owner-operators with facilities in secondary and tertiary markets: “It’s aimed at primary markets. It’s not working as well in smaller markets,” he says, adding that Extra Space’s facilities that operate under the Northwest Self Storage brand are using a different pricing model.

Per McLean, the REITs’ pricing strategy is also impacting data collection. “Demand and rates are harder to determine,” he says, which is throwing a wrench into the works. “Looking in a trade area to determine if the rates are high enough to make a development pencil has been harder in a REIT-heavy market as the discounted teaser rates are the only pricing information publicly available, making it hard to determine the achieved rates a unit can get to over a 12-month period.”

Because lenders, investors, developers, appraisers, buyers, and sellers utilize rental rate data to make comparisons and decisions, and the public information found online is comprised of teaser rates instead of actual rates, it’s becoming more difficult to make accurate conclusions for underwriting, valuations, and market demand for self-storage.

Therefore, instead of simply pulling reports based on rental rate data collected from facility websites, industry players must shop the competition and use additional resources, such as MSM’s annual Self-Storage Almanac, to obtain data about the actual rates tenants are paying after the concessions lapse.

“For Radius+ it is widely business as usual, as an agnostic data provider aggregating publicly available data and sharing it with our clients,” says McLean. “However, we’ve found ourselves updating our clients on the state of the market, informing them of the new pricing strategy.”

On top of revenue and data concerns, the REITs’ pricing strategy could provoke litigation and/or regulation. And it may have already blemished the industry’s reputation. “Self-storage is needs based,” McLean says, adding that many customers require storage space during turbulent, unsettling times in their lives. That’s what leads him to question the decency of the REITs’ pricing strategy.

“It’s like exploiting or capitalizing on their need for storage. Extreme ECRIs (existing customer rental increases) is where the self-storage industry’s reputation could be affected. It was typical for them to increase 20 to 40 percent in one year,” he says. “Now they are increasing 80 to 100 percent in some instances.”

McLean isn’t the only one to feel that way. Disgruntled customers across the country have been expressing their dissatisfaction with the dramatic price hikes on social media and voicing their concerns to their city council members and various media outlets—all of which could spell trouble for the entire industry, not just the REITs and the operators that have mimicked their antics. For instance, too many consumer litigation claims and/or grievances reported to government officials could result in rate caps or other regulations. Of course, those outcomes would lead to more negative press for the industry and likely compound the adverse scrutiny, which nobody wants.

“Caps on rates could be detrimental,” he says. “There has been push back. The wheels are turning.”

Although McLean acknowledges that “no one’s being held hostage,” or forced to remain a tenant, and monthly leases permit unhappy customers to move out before a rental increase goes into effect, exorbitant increases tend to leave a bad taste in customers’ mouths—regardless of whether they choose to stay and pay or part ways.

What’s more, losing a portion of customers—from excessive rental rate increases by following the REITs pricing strategy or from “promo hopping” by not matching it—is not a loss all operators can afford to absorb.

“Is there a threshold for staying? What is it?” asks McLean. “The REITs can fill back up from their funnel, but not everyone has those resources.”

To keep tenants from ditching their units for alternatives, such as warehouse, office, or portable storage, McLean believes the industry needs to “stay in good graces with its customer base.” And he says transparency is the key to doing so. Here are some ways owner-operators can remain upfront with potential and existing customers:

• Create “explicit promos” and provide all the details to your managers. By having clear terms and conditions, managers can present customers with accurate information about their post-promo rates and let them know about future rate increases.
• Include the terms and conditions for your promos on your website and/or print promotional materials. Customers need to know from the get-go that the discounted rate isn’t permanent and that increases will occur throughout their tenancy. If you have a set schedule for ECRIs (for example, every six and 12 months), you may as well disclose the frequency. If you consistently raise rates a specific amount or percentage, post that information too.
• Develop an addendum for introductory rates and require tenants to sign it when they sign their rental agreement. The addendum should state that by signing the form the tenant acknowledges that the low rate is introductory and will eventually increase.

“People have a right to know what their monthly bill will be,” McLean says, adding that customers should be the first priority. “Maintain a level of transparency and predictability. We shouldn’t shift from the fundamentals that got the industry to this point. It’s about mutual respect, renter respect. Maintaining occupancy and trust is important.”