Is Your Self-Storage Business Capable of Surviving a Downturn?
In case you haven’t noticed, the economy is in flux.
The S&P 500 index entered bear market territory in June, new home sales slid 17 percent in April and the Federal Reserve okayed its biggest interest rate increase since 1994.
So, what does this mean for the self-storage industry?
Right now, it’s still a bit unclear. Overall, these economic changes point to the possibility that a recession will arrive sometime this year or next.
But one thing is for sure—now is the time to brush off your marketing chops and start preparing for leaner times.
Is a recession coming?
Another signal that a recession is approaching is the inverted yield curve. Under normal conditions the yield curve goes up, with a greater rate of return for long-term treasuries than short term ones. When the yield curve inverts, that means short term bonds offer a greater return than long term bonds. This indicates investors see short term weakness in the U.S. economy, making the longer term note a safer investment.
On June 20, the yield curve between two-year and 10-year notes inverted for the first time since April (which was the first inversion since 2019). Spreads between five-year and 30-year notes, and three-year and 10-year notes also inverted. According to Reuters, yield curve inversions have taken place 28 times since 1900, with a recession following the event 22 of those times. The past six recessions have occurred six to 36 months following the inversion of the yield curve.
While an inverted yield curve has a good track record of predicting recessions, it isn’t fool-proof. It also doesn’t tell us how long, or how bad, the next recession might be. But as far as canaries in the coal mine go, it is a pretty good one. The good news is that it is a leading indicator, which means if there is a recession coming—there is a window of time for self-storage operators to prepare before it hits.
Preparing your self-storage operation to survive the next economic downturn
The last few years have been incredibly good for the self-storage industry, with COVID-19 and automated technology converging to create an environment of record high occupancy coupled with record high rental rates. The winning combo of elevated occupancies and rents has padded NOI for storage operators big and small, and inspired previously unseen levels of institutional investment into the space
However, with rates and occupancies at record highs, there is little place left for them to go. Operators looking to grow their business would typically build more units. But rising interest rates, along with sustained supply chain and wage shortages, have made building new facilities more cost-prohibitive. The current supply crunch is expected to continue for the foreseeable future as consumer demand remains high and many developers sit on the sidelines.
At the moment, many of these fundamentals seem locked in place. But history and common sense teaches us that this will not be the case forever. That makes now the perfect time to start thinking about what strategies you will put in place to navigate the downturn when it arrives.
Below are six things you can do now to prepare your operation for the next downturn.
1. Focus on rate optimization
If a recession is on the way, the window to get the most out of rental rate optimization could start to close when it gets here. Optimizing rental rates is a form of revenue management that adjusts rental rates based on market conditions. Rate optimization, or revenue management, can be done automatically, manually, or a blend of both approaches. No matter how you do it, the idea is the same: Look at what your tenants are paying, look at what your competitors are charging, and adjust accordingly.
In the current environment with high occupancy rates and rents, one of the most effective rate optimization tactics is to raise rates on existing tenants. The key is to increase rates by just enough so as not to significantly increase the number of move-outs. In the current high-demand low-supply environment, you are likely to quickly replace any tenants that do move out of their unit over a rent hike. Tenants are likely to move out because there are few alternatives and another storage unit will likely cost just as much, if not more when you add in the cost of renting a truck to move.
In a recession, however, backfilling vacant units might not be as easy because there is less demand, and more consumers are price sensitive. Anything you can do now to drive incremental revenue today will help your cash position in the future.
2. Perfect your online presence
In a downturn, you can expect less demand overall. That means you’ll need to step up your marketing efforts to attract tenants, something you might not have had to worry about in a long time.
The COVID-19 crisis strengthened the affinity among consumers for ordering goods and services online. That preference has made its way to the self-storage industry as well. Companies that upgrade their facility websites so that they can offer 24/7 online rentals and account management will reap the benefits when they must compete more aggressively for new customers. If you do not offer a functional website, many potential customers will choose instead to do business with a competing storage facility that does.
3. Refine your SEO
Consumers find your website primarily one of two ways: via paid media or organic search. Paid media includes things like Google AdWords, Facebook Ads and so on. Expect to increase your spending on paid media in a down market.
As far as organic search goes, now is the time to start laying the groundwork using search engine optimization (SEO). Start by going through your website and looking for ways to improve load times and performance. Site speed is a major component of the Google algorithm that determines how it ranks your site on the search results page. Undertake a review of your current performance for relevant keywords and put together a strategy for increasing rankings. Create a blog and start posting keyword rich content related to your storage business.
It can take a few months for your SEO efforts to start to pay off. By getting started now, you can hopefully start seeing results when it matters most.
4. Increase tenant protection efforts
In tough times, you can expect to see shifts in tenant behavior. You might see more tenants opt out of tenant insurance or tenant protection plans in order to save money. If they can prove they are covered by their existing homeowners’ policy that is fine, but otherwise it’s a mistake to let customers rent from you without proper protection in place.
In a recession, more of your tenants may be going through some sort of economic distress. That means if a tenant suffers a loss in their self-storage unit, it is more likely to have a bigger impact on their financial security than during flusher times. Without a tenant protection plan to turn to, affected tenants are more likely to turn to you for compensation and with greater vigor. More may also turn to review sites to rail against you when they learn that you are not responsible for their stored items. By making sure every customer is covered by a tenant protection plan, you mitigate many potential legal, financial and reputational risks.
5. Consider a call answering service
In a downturn, you’ll be spending more time on marketing. This means not only will you have more leads to follow up on, but you will also have less time to do it. Instead of hiring additional employees to handle this, consider opting into a call answering service. A call answering service gives you additional capacity during peak times, so your on-site team can spend more time with walk-ins and other important duties. Start comparing services now so you can put your solution in place when the time is right.
6. Reduce delinquencies
Depending on the depth of the next recession, you can expect to see a rise in delinquencies. That means more time and costs managing the lien process, as well as dealing with collections and auctions. You may not be able to stave off every delinquency, but many can be avoided.
Most missed payments are the result of forgetfulness. In a downturn you would expect the number of delinquencies due to economic hardship to go up, but the ones caused by oversight should remain constant. Use your facility management software to set up workflows that will automatically send payment reminders and late notices to your tenants via text or email along with a link to make payment. Put a reminder system in place now to avoid getting caught off guard if economic conditions cause a spike in late payments. Forgetful tenants will be less likely to fall behind, reducing the overall delinquency burden you might face during a struggling economy.
Safeguard your operation the Easy way
Whether there is a recession next week, next year or even further in the future, it is beneficial to begin thinking about the changes you will need to make to keep your business thriving. Storage isn’t recession resilient automatically, owners must make certain adjustments in order to do well in the new environment. Technology makes it possible to implement the needed changes quickly and effectively. By evaluating and test-driving different techniques and services now, you will be able to pivot immediately in the event of a major market correction.
With facility management software, SEO-optimized websites, call answering, tenant protection plans and access control, Storable offers everything you need to grow your self-storage business in good times or bad.
Al Harris is the editor of the Storage Beat and content manager at Storable. Based in Austin, Texas, Storable is the world’s leading provider of self-storage technology, delivering a full suite of products including management software, websites, access control, insurance, payment processing and the internet’s largest marketplace for renting self-storage units. Storable’s mission is simple: to empower storage operators to do more.