The Yield Curve Has Inverted!

by Alden Chang

What impact does it have on your pricing strategy?

For those unfamiliar, a yield curve is a line plotting notes’ and bonds’ interest rates over a range of maturity dates. These notes and bonds must have the same credit quality. The maturity dates range from three months all the way to 30 years. Of interest are U.S. Treasury Notes with maturity dates of two and ten years.

A normal or sloped up yield curve shows longer-term yields exceeding that of shorter-term ones. This is considered “normal” because longer-term debt means exposure to more risks. Therefore, the market expects more yield. Also, investors of longer-term notes and bonds have their money locked up longer and expect more compensation. The converse is true for shorter-term debt.

Why is an inverted yield curve important?

You may have heard the news that the yield curve was inverted. This means shorter-term yields exceed that of longer-term ones. Starting on December 4, 2018, there were several days in December where the shorter-term two-year Treasury yield crested the five-year yield (but not the ten-year yield). You may have also heard that an inverted yield curve is thought to be one of the best predictors of an upcoming recession.

According to the Federal Reserve Bank of San Francisco Economic Letter dated March 5, 2018, “Every U.S. recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve. Furthermore, a negative term spread was always followed by an economic slowdown and, except for one time, by a recession.”

There is of course, much more to that statement. Analysts put less weight on five-year yield over the two-year.  The primary yield curve metric is the ten-year Treasury yield over the two-year.  Their rates were never inverted in December.  Some analysts argue that the economy is constantly changing, and past metrics may not apply. Other economic indicators remain positive, such as the Purchasing Managers’ Index (PMI) for manufacturing and service sectors.

What does that mean to your pricing strategy?

While you can certainly debate of when an economic recession will occur, there is no debate that recessions do and will occur. The current economic expansion is one of the longest ones on record. The question then becomes what pricing strategies do you adopt if a downturn should occur?

The short answer: Have a pricing strategy–a methodology and supporting information technology–that you execute consistently with discipline, regardless of the economic conditions. The same practices you use during expansionary times will be the same ones you use during recessionary times. We will explore this further in upcoming blog(s).

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Devon Self Storage: Realizing the Benefits of VRMS

by Alden Chang

In an earlier blog, we talked about how Devon Self Storage rolled out the Veritec Revenue Management System (VRMS) to its facilities. Now, we will explore the benefits being obtained.

To recap: Devon Self Storage, with 25 years of experience in Self Storage, rolled out VRMS to its facilities in April 2018. Devon presently has self-storage facilities across the U.S. in 12 states. The company takes pride in their selection of facility features, upkeep, and knowledgeable storage professionals. Their dedication to customers is illustrated by consistently high reviews and repeat business.

“We are honored to have Devon Self Storage as a customer of ours. We look forward to Devon experiencing increased revenues with VRMS,”said Dr. Warren Lieberman, President of Veritec Solutions.

After rolling out VRMS to their facilities, Devon began realizing benefits almost immediately, starting with new customer move-ins. (Devon, as part of their configuration, chose to offer three prices for each unit group, based on the relative convenience of the available units. VRMS dynamically determines the price for which units can be rented, as it tracks move-ins and move-outs each day. Consequently, the relative convenience, and the reflected price, of each available unit changes over time. )

“In the first month almost 30% of our customers chose to upgrade to a Best Value or Deluxe unit. As we have gained experience with the Value Pricing programs, our customers are upgrading at an even higher rate. As of June (2018) that percentage has grown to more than 35%,” according to Angus Morrison, Executive VP of Operations. Our revenue from move-ins is more than 4% higher than what it would have been without Value Pricing.”

He continues, “June had net growth in rental rates of $5,651 in additional monthly revenue. If we assume that those customers stay for an average of 12 months, the upgraded rates would yield an additional $67,452 over the next year from customers that began their rentals during one month of leasing activity.”

This is not just for new customer move-ins. What about those customers with existing leases?

“In June, Devon sent out 1,107 rate increase letters for a total increase of $12,113 in monthly increased rent,” said Mr. Morrison.

And Devon uses VRMS to help determine base rental rates. Mr. Morrison summarizes, “Looking at data as of March 31st, our Gross Potential Rent was $3,147,220 while our Actual Occupied rates were $2,386,090. Compare that to July 31st and our Gross Potential was $3,157,974 but our actual rent had grown to $2,524,347. Overall, we are pleased with the performance thus far in 2018.”

While no doubt, the credit really goes to the good people who run Devon Self Storage. Veritec Solutions is proud to be a contributing member. And, like Devon, Veritec is dedicated to its customers.

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Florida SSA 2019 Conference and Expo

by Alden Chang

We are pleased to announce that Dr. Warren Lieberman, President of Veritec Solutions, will be hosting a session on a much sought-after topic, Latest Trends in Pricing and Revenue Management, at the Florida Self Storage Association’s 2019 Conference and Expo. Warren’s talk will be on the morning of Friday, February 15th. The conference will be held February 13–15 at the Embassy Suites by Hilton Orlando Lake Buena Vista South, Kissimmee, Florida.

Warren will be discussing how different approaches to raising customer rents can have a profound impact on the revenues and profits earned at a self-storage facility. The same is true for how move-in rates and move-in concessions are managed.

In his presentation, he will share best practices in revenue management and pricing within the self-storage industry, and in other industries as well. The goal is to identify opportunities available to any self-storage operator regardless of portfolio size.

Warren will address questions such as:

  1. Should customer rents be allowed to exceed the street rate?
  2. What factors should affect the amount of a rent increase?
  3. How can revenues be increased for a lease-up store?
  4. What are the financial impacts of a small price increase?
  5. How often do customers move-out due to a rent increase?

He will even do some “myth-busting,” based on real-world examples that, interestingly, might run counter to conventional wisdom.

Don’t miss this opportunity to see how these insights can significantly help increase your revenues through time-tested revenue management and pricing strategies!

Registration information for the Florida SSA 2019 Conference & Expo here.

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