Can you imagine the ability to take lease renewals off your long list of things to do? That is my challenge for the apartment industry. My personal recession recovery plan and if we all jump on board we just might save the world of apartment leasing from total meltdown.
The theory: For the next 12 months, we will be writing leases that will more than likely be loaded up with a rent decrease and in many markets, an up front concession. If we allow that lease to expire in the next 12 - 24 months we might just find ourselves having to do it again. Seems like the perfect reason to avoid expirations for the next two years.
How do we do this? Sell a longer term lease of 15 - 24 months. The plan benefits the owner because we can decrease turn costs or more bleeding economic vacancy loss. And for the renter, they are locked into a rental rate for a longer term. For most of my 21 year career, this has not been a great idea because we will miss the opportunity to grow rent. However, very few years presented enough of a rent increase to make the turnover costs worth it. Owners push rents in increase the value of the asset.
If we face the facts, very few markets will see much rent growth in the next 12 - 20 months. If we can stabilize and stop the burn we have a shot at improving by the end of 2011. All together now, take a breath and say STABILIZE. Lock in residents for longer terms and avoid having to offer your market rent and concessions to renewals. Hopefully with less vacancy you will reduce the concessions, supply will decrease and we will start to see rent increase before the next presidential election.
The theory: For the next 12 months, we will be writing leases that will more than likely be loaded up with a rent decrease and in many markets, an up front concession. If we allow that lease to expire in the next 12 - 24 months we might just find ourselves having to do it again. Seems like the perfect reason to avoid expirations for the next two years.
How do we do this? Sell a longer term lease of 15 - 24 months. The plan benefits the owner because we can decrease turn costs or more bleeding economic vacancy loss. And for the renter, they are locked into a rental rate for a longer term. For most of my 21 year career, this has not been a great idea because we will miss the opportunity to grow rent. However, very few years presented enough of a rent increase to make the turnover costs worth it. Owners push rents in increase the value of the asset.
If we face the facts, very few markets will see much rent growth in the next 12 - 20 months. If we can stabilize and stop the burn we have a shot at improving by the end of 2011. All together now, take a breath and say STABILIZE. Lock in residents for longer terms and avoid having to offer your market rent and concessions to renewals. Hopefully with less vacancy you will reduce the concessions, supply will decrease and we will start to see rent increase before the next presidential election.
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written by H. Jackson Wallace, November 24, 2009
ReplyDeleteKate - stability, what a great word for the times. Very interesting idea and something we all should consider. As always there is a trade off. We are constantly looking for ways to make more money, but these times require a hard look at all aspects of management. Being able to increase terms could certainly help with turnover costs, which goes directly to the bottom line.
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written by Barbie Tucker, November 24, 2009
We have also marketed as an recession advantage for the resident.
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written by lauretta ludwig, November 24, 2009
We live in a winter climate and do not have any leases expire in the winter months. Therefore any new rentals automatically go on a 15 - 17 month lease. Although this is a great idea for renewals. The challenge will be to balance out the lease expirations.
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written by Kathleen Silver, November 24, 2009
Kate,
As much as we'd love to lock in long term leases (we've attempted this very thing for over a year now to an 18-mo length) we've found a majority of residents resistant to the time commitment. In fact, there is much higher demand lately for 6-12 mo. terms due to the housing market/incentives for FTHB.
We do then have an "advantage" of placing a "premium" on the shorter lease without much resistance as residents realize that an attractive offer is on the table so as long as there is a choice...it eases the "haggle" factor.
Regionally, however; this can work in some markets where things are pretty bad all around. But, in Silicon Valley, CA we've found a majority don't want to lock the term in.
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written by lauretta ludwig, November 24, 2009
I guess the WI market is different. We find promoting the long term lease is most effective especially during these hard economy times. No rent increase for 15-18 months. It's all in the sales presentation.
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written by Kate Good, November 30, 2009
The key to this program working is to take the fear out of signing a long term lease agreement. Put a clever marketing spin on your cancel policy and make sure it is reasonable. (You can always be your tough self when the recession ends!). When you have the correct tools to market this it becomes a sales issue and a good sales person can sell this! And, since the lease term is longer, try increasing the leasing teams commission. Money motivates!
Thanks Kate, you are spot on with longer term leases. You have been very generous with you concepts over the years, thank you. Turnover is a critical aspect of what we do, as you may recall we had great success with “Early Renewal Events” in the past. By giving people a $500 Visa Gift Card in December or $500 off their rent for simple extending their lease for an additional 12 months you push out your expirations and stabilize the property. Add longer term leases and you add some real value. Do it at Christmas and you create goodwill. “Need $500 for Christmas Presents, no problem, just stop by the office and extend you current lease at your already incredibly low rate and we will give you a $500 Visa Gift Card to spend anyway you want, our way of saying Merry Christmas, Happy Holidays and thanks for living at Hermosa Pointe.
ReplyDeletePut some numbers behind that:
Assume a midsize owner with 5,000 units.
Drop Turnover from 80% to 60%
Assume Turnover cost about $4,500 a unit. (It does, two months loss rent, one month concession, $1,000 in turn cost and $500 in commissions, advertising, leasing)
Your turn goes from 4,000 unit a year to 3,000.
Your turn cost goes form $18M to $13.5M
NOI goes up by $4,500,000
At today’s cap rates your create $56,250,000 in value just for giving away some Visa Gift Cards and writing longer term leases.
If you want longer term leases:
1. Give larger concessions for longer term leases.
2. Pay larger bonuses and locator fees for longer term leases.
3. By assumptive, use an 18 month lease as a standard, not a 12.
Scott K. Knauer
Principal and Chief Investment Officer
7144 E. Stetson Drive, Suite 410
Scottsdale, Arizona 85251-3275
www.orionresidential.com
(P) 602.952.8300
(C) 602.339.1616
E-Mail: sknauer@OrionResidential.com
Does this strategy sound interesting to you? Is your current management company and or owner not seeing the light? Allow me to personally discuss this strategy with your leadership team. I am certain I can make a difference and prepare for amazing success in 2011 and beyond. The multifamily sector will recover and in many markets we will be the first sector to recover. It's time to stop leaving money on the table due to traditional management policies such as 12 month leases.
ReplyDeleteAnd, Scott and his team get it (see the comment above). We work together and can work for you.
Thank you for reading my soapbox. Now email me and let's get to work!