Self-storage occupancy: Understanding the 3 types

A very common measure of performance in the self-storage industry is facility occupancy, but not everyone understands that there are different types or how they relate to each other. In this article, I’ll explain the three types of occupancy – physical, square footage, and economic – and why it’s important to understand and compare them.

3 types of occupation

Whether you’re making projections for a self-storage development, evaluating a potential acquisition, or analyzing the performance of an existing facility, it helps to understand site occupancy and how it’s measured. Here’s an overview of the three types and how they intertwine.

physical occupation. This is the number of occupied units in a self-storage property, expressed as a percentage. This common metric provides a quick snapshot. If your establishment has 100 units and 75 of them are occupied, you are at 75% physical occupancy. But because the units come in different sizes, this number doesn’t provide a completely accurate picture of vacant versus occupied space. This is where occupancy per square foot comes in.

Occupancy per square foot. It is the number of occupied and lettable square feet in a facility, also expressed as a percentage. Let’s take the example above and say we have 100 self-storage units. Half of them are 10x10s and the other half are 5x10s. This makes our total inventory 6,250 square feet. We know that 75 units are provided, but which ones? Let’s say 40 are 10×10 (4,000 square feet) and 35 are 5×5 (875 square feet). This makes our square foot occupancy 78% (4875 / 6250 = 0.78), which is greater than our physical occupancy.

Yet this tells us nothing about the revenue generated by our available space. For this, we must look at economic occupation.

Economic occupation. This is the percentage of gross potential revenue from available self-storage units. It takes into account the maximum market rate which could be charged for each space in relation to the amount of the rent Actually being collected.

Returning to our example, let’s say we have 50 10×10 units that rent for $100 each and 50 5×5 units that rent for $50 each. Our total income potential, if we rent each unit at full price, is $7,500 per month. However, this rarely happens. There are almost always vacancies; Additionally, it’s common in self-storage to offer some sort of discount or promotion to incentivize move-ins, such as the first month free or 25% off the first three months.

Any unit we rent, regardless of price, increases our physical occupancy or square footage. A filled unit is a filled unit. It is when we look at the revenue received that we understand the lost potential. A unit that was rented for free in the first month counts towards our physical occupancy and square footage, but does not increase economic occupancy at all, until the tenant begins to pay rent in the second month. The same is true when you have tenants who don’t pay rent at all due to bad debts or when you remove units from inventory for internal use. Whenever you don’t collect the market rate on a space, it negatively impacts your economic occupancy.

Let’s go back to our example. We have 100 units. We rented 40 of our 50 10x10s, which are supposed to sell for $100 a month, and 35 of our 50 5x5s, which sell for $50 a month. The total economic potential of this facility, when completely full and at market rate, is $7,500. Our physical occupancy is 75%, while our square foot occupancy is 78%. But let’s say we rented 15 of our 10x10s at 25% off for the first three months. What is our economic occupation? We collect:

  • Full price on 25 10×10 = $2,500/month
  • Reduced price ($75) on 15 10×10 = $1,125/month
  • Full price on 35 5×5 = $1,750/month
  • Monthly total = $5,375

In this case, our economic occupancy is 72% ($5,375/$7,500), which is lower than our other two occupancy types. On the other hand, if we rented all 75 units at full price, our economic occupancy rate would be 77%.

put them all together

When reviewing a self-storage property, all three occupancy types can be expressed together to provide a quick assessment. For example, you might say, “The building has 75,000 net leasable square feet in 500 units. A total of 90% is rented, with economic occupancy of 80%. This provides the lender or investor with a concise overview of the facility’s status. In this scenario, it shows that there are strong locations with room to improve performance.

Alternatively, if your building has 45,000 leasable squares in 500 units, but physical occupancy is 50% and economic occupancy is 30%, there are issues to address. First and foremost is 55,000 square feet of lost opportunity. Those lower numbers could indicate that the facility is rented out, or maybe there’s just a huge avenue for adding revenue.

Income impact

Now that we have a better understanding of the three types of self-storage occupancy and their relationship, let’s look at a real-world case study on the relationship between these metrics and revenue. The subject property is a Class A facility that has been converted from a commercial building. During the rental, we fully rented the 10×20 units, but our 10×10 rentals fell behind schedule. When customers came for larger units, we tried to rent them two of the smaller ones instead; however, no one wanted to do this because the cost per square foot was higher.

In the end, we decided to convert 20 of our 10×10 units into 10 10x20s. This reduced our total number of units by 10, which impacted our physical occupancy and square footage. We have also increased the price of our 10x20s, thereby increasing our potential gross income and shifting our economic occupancy.

The removal of an interior wall in 10 units changed our occupancy rate in all three categories. As a result, we had to reach out to our lender and investors to explain why physical unit counts dropped, square footage stayed the same, and economic occupancy increased. Without knowing the story, they would probably have thought the monthly reports were inaccurate.

This is one of the reasons I like self-storage: we have the ability to change the configuration of units to improve rental performance. Keep in mind that this approach may be easier in some establishments than in others. Yet understanding each type of occupancy is key to assessing value and knowing how much revenue a facility can generate.

A complete picture

All three types of occupancy tell you something about a self-storage property, but economic occupancy is the most important of these metrics when evaluating an existing business. If the number is low, see if you can increase rental rates or improve collections. Then ask yourself if it is possible to increase the square footage. If so, figure out what unit sizes the market really needs.

Ultimately, it’s important to understand what each occupancy type reflects, how it’s impacted, and how they correlate. Knowing all three provides a complete performance picture and insight into the cogs and bolts of any self-storage operation.

Scott Krone is the founder of Coda Management Group, which specializes in the management of real estate assets, including self-storage as well as multi-family, retail and commercial warehouses and flexible multi-use spaces. Launched in 2012, the company has invested over $70 million in self-storage. In 2020, Krone co-founded One Stop Self Storage, which operates facilities throughout the Midwest. To reach him, call 847.272.7775, Ext. 1; E-mail [email protected].

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