Let’s talk about the two occupancy types, how they differ, and how to use them to set key performance indicators (KPIs) and drive performance at our properties.
Occupancy Types
Physical occupancy is the easiest to gauge but the least informative from a revenue standpoint. It’s simply a measure of how many self-storage units are occupied. While it may feel good to walk around your site and see all those tenant locks, high physical occupancy doesn’t mean the facility is producing the most revenue it could. In fact, 100 percent physical occupancy should never be a goal. As an investor, when I hear a manager brag about being at 100 percent, I know the facility’s revenue isn’t being maximized and I see opportunity.
Economic occupancy is the percentage of total gross potential rental income (GPRI) that’s being collected. If your facility has an annual GPRI of $100,000 and your annual rent collections equal $80,000 (excluding ancillary revenue for things like moving supplies, tenant insurance, late fees, etc.), you have an economic occupancy of 80 percent.
Unlike with physical occupancy, it’s desirable to achieve 100 percent economic occupancy. That should be every manager’s goal: to collect as much rent as possible on every occupied unit.
There are three factors that affect economic occupancy:
- Delinquent units: When a tenant fails to pay, your unit is off the market and yet no revenue is being collected.
- Discounted units: A tenant might be paying less than your street rate for various reasons such as a promotion, your failure to raise rates over time, or because he made a partial payment rather than full.
- Vacant units: There’s no revenue here yet, but the opportunity is there.
Let’s look at an example of how discounts affect economic occupancy. Say your street rate for a 10-by-10 is $100 per month, but you’re running a promotion and offering the first month for free. The annual GPRI for that unit is $1,200. If your tenant stays for one year, you’ll collect $1,100, which gives you an economic occupancy of 91.7 percent on that unit. If he only stays for six months, you’ll collect $500, giving you an economic occupancy of 83.3 percent on that space.
Measuring Occupancy
The late author and management consultant Peter Drucker said, “What gets measured gets improved.” Both types of self-storage occupancy can be measured at the facility level and the unit level. Facility-level measurements are an aggregate of all units, calculated as a percentage of the whole. For example, if 450 of 500 units are occupied, I’m at 90 percent physical occupancy. If I’m collecting $96,000 of my total GPRI of $100,000 on those units, the economic occupancy is 96 percent.
The facility level gives a holistic view of how the property is performing overall. However, the industry’s best operators measure occupancy based on individual unit size as part of their revenue-management strategy. Why? Because doing so enables them to more carefully adjust their rates and operational approach. It’s called dynamic pricing. You set your rental rates based on availability within a specific unit category. Some operators have taken this method to an even higher level and delineate by unit location as well as size, for example, by floor or proximity to the elevator, gate, office, etc.
