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Thread: Panic driven rates
28th February 2008, 05:11 PM #1Junior Member
- Join Date
- Feb 2008
Panic driven rates
I have a competitor that opened down the street just in time to see the bottom fall out of the Florida market His new large, modern, expensive facility is somewhat overbuilt for the area and he has a huge number of units vacant....about 60,000 SF.
It is evident he now is in the panic mode and is offering rents about 1/2 off of what we and the rest of my competitors are charging. I am confused, even if he fills up, his income will not cover his debt service and once he raises his rates, he will loose his tenants......or will he???
My competition is either really smart or really dumb, I don't know. Has anybody out there ever experienced this?
28th February 2008, 06:03 PM #2Member
- Join Date
- Jan 2008
Many times. Especialy if the operator isn't a larger player with deeper pockets.
When a facility is funded it is using a proforma to determine cash needs during its rent up period. There is a period of time when FFO (funds from operations) doesn't cover expenses. This short fall is rolled into the overall funding the developer/investors package for financing. Regardless the source, they walk into it with funding to cover this.
If rent up doesn't perform as expected, either in rates or occupancy levels forecasted, they have to do something. They can either source additional funds or take more aggressive steps to get back on track with NOI. It is not unusal for the attitude to be 'I would rather get SOMETHING for the space than NOTHING'.
During a rent up occupancy at a 'reasonable' or slightly under market rate is king. Some would say occupancy alone is king. Rate can be worked on later. With most locations seeing an internal tenant churn of 6-8% monthly during the 2nd year of operation and thereafter is normal. This means 70%+ of the building is replaced with new tenants each year. Here is where the opportunity to capture a higher rent per sq ft presents itself.
Obviously, your competitor is in trouble. The degree is unknown. They may just need a shove to get themselves to the NOI level needed before funding dries up. Or, they may need more than a shove and are risking destabilizing the entire local market to get it. Remember, they also forecast to investors what the location was going to be worth after a period of time (3-5 yrs) in order to plan an exit strategy or refi opportunities. This is based upon NOI and cap rates. The last thing they want to upset is this longer term value.
The last thing you and the others in your market want to do is over react. You have to determine how well you are doing renting to your potential customers before you can worry about what the left field competitor is doing. If you have been getting let's say, 70-80 inquires a month and closing 60-70% of them, and now find yourself getting 50-60 inquires and closing 40-50% you would need to reevaluate what is going on in the market.
People, product, promotion and price. Work to make your sales, presentation and customer services skills 2nd to none. Make sure your store looks and functions as good as possible. Create a promotion program to get more people inquiring. Maybe you can get more people interested while closing the same lower percentage producing the same occupancy and rent per. If all this is being done 100% then price is the only other factor (and I believe should be the last) to move on.
Darn.....that sure got long winded. Hope this helps.
29th February 2008, 08:36 AM #3Junior Member
- Join Date
- Jan 2008
- Cincinnati, Ohio
I agree, this is very common for small operators trying to get through the lease up period. All they are worried about is showing the bank certain occupancy levels by certain dates. They figure all will work out in the end if they keep the bank happy.
But also beware, established locations often times run promotions like this. I have a competitor that has been around for 10+ years. They are currently running a special that you get one month free for each month you pay up front up to 6 months. So you can pay for 6 and get 6 free.
That is crazy but they are doing it. I find that these types of promotions typically are done right before a company sells. Again, they are trying to push up occupancy rates so they look more valuable.
Either way, evaluate yourself first. Are you hurting? What can you change to increase your occupancy without stooping to these ridiculous levels. In the end, if we all did what they are doing then the storage industry would ruined over night.