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Is the Multifamily Industry Throwing Away Its Marketing Advantage?

Is the Multifamily Industry Throwing Away Its Marketing Advantage?

Over the past few years, I feel as if I’m seeing a repeat of Sally Field’s infamous “You Like Me” speech at the Oscars many years ago.  As an industry, we started clamoring that apartment living was becoming a “choice” for renters who actively decided to live in apartments rather than buying a home, and we have patted ourselves on the back that our multifamily industry is now on par with single family housing.  Not only that, but we have strong data to back that up!  Vacancies continue to fall across the country, and rents are rising at blistering speeds.  It’s a good time to be in the apartment sector, isn’t it?  But when considering the long term competitive advantage of the multifamily industry, is this all a mirage?

When we look at the recent spikes in rent and occupancy, can we put our finger on anything that we have done to make this happen?  Yes, I think the industry is evolving and changes are being made, but let’s be real, the positive financial impact was not made because we had dramatically changed how we do business.  Rather, the financial impact was almost completely independent of us, and we just happened to be in the right place at the right time.  Although I feel for all those that were affected by the foreclosure crisis, it did send a lot of renters to our doors in search of something more flexible and less risky.  Plus, the lending market dried up so that potential homebuyers could no longer get financing and new multifamily projects could not get off the ground.  So we had a perfect storm of rising demand and static supply that greatly favored apartment living.

The question now is it sustainable?  Yes, the trend may continue in the short term until supply catches up and the financing restrictions ease across the board, but longer term, has anything really changed?  For all those residents who “chose” to live in an apartment, will they make that same choice after their rent has gone up $150 over two years?  A report from the UCLA Ziman Center for Real Estate indicates that rising rents will push renters back into homeownership in approximately two years, and this quote from UCLA economist David Shulman is especially appropriate:  “The American Dream of homeownership may be comatose, but it is not dead, and the wake-up call will come in the form of higher rents.”

I understand the need to capitalize on market conditions that take advantage of higher market rates, but looking at the situation from an industry-wide point of view, this shift is also doing its best to destroy the thought that buying is more risky than renting.  And if that is true, then we are back to square one in our competition against single family housing. 

I am not advocating that we artificially keep rents low to maintain this competitive advantage, but rather, I hope that we use this current surplus in profit to rethink how we as an industry operates.  What are we bringing to the table to truly be a “choice” for renting versus homeownership?  I am afraid that if we don’t capitalize on this opportunity, the inevitable market reversal will leave us scratching our heads as to what went wrong and how quickly we can offer 2 months free as a concession.

Brent Williams is Chief Insider of Multifamily Insiders.  You can connect with him on LinkedIn or on Google+.

 
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You are speaking my language now, Brent. Recently, I had some real estate experts from another city tour our community only to state, "Why aren't the rents on this unit X dollars?" They all looked at each other congratulating themselves on being so "bold" when I simply looked at them and asked, "Why do you think the rent should be so high?" They then turned to one another and said, "Well So-and-So's rents are $100-150 higher on the same size unit. You should be charging at least X dollars."

I have increased market rents twice this year and on some unit styles, increased for a third time. In this way, I do not gain to the lease and I will always be at "market rents" on the popular styles. However, I am always aware of what is going on in the "sub markets," too, and will adjust accordingly. I have been an advocate of this strategy from Day One. While these guys obviously thought I was wasting an opportunity, I believe that our Current Residents deserve fair increases - if someone moves in today and is charged a huge price difference, fine, (GREAT!) but what happens to the current Resident in the same unit type at renewal? Ask and get a moderate increase, is my philosophy, but I dislike someone telling me this person who has been a valued community member for two or three years (and loyal when there was plenty of opportunities to move to a less expensive apartment during the recession) should now be paying a huge increase to make up the difference between then and now. I am in the minority, I know. I also realize that if the entire market charges X dollars for the same square footage (apples to apples) and no one is offering Specials, then of course you may be able to get away with a huge increase.

“It’s about sustainability and it’s about being consistent,” I said to the experts. I compare each variable of this community to the true comps first and charge according to our perceived value. It works in all economic eras. “I can always increase the rents, but how...

You are speaking my language now, Brent. Recently, I had some real estate experts from another city tour our community only to state, "Why aren't the rents on this unit X dollars?" They all looked at each other congratulating themselves on being so "bold" when I simply looked at them and asked, "Why do you think the rent should be so high?" They then turned to one another and said, "Well So-and-So's rents are $100-150 higher on the same size unit. You should be charging at least X dollars."

I have increased market rents twice this year and on some unit styles, increased for a third time. In this way, I do not gain to the lease and I will always be at "market rents" on the popular styles. However, I am always aware of what is going on in the "sub markets," too, and will adjust accordingly. I have been an advocate of this strategy from Day One. While these guys obviously thought I was wasting an opportunity, I believe that our Current Residents deserve fair increases - if someone moves in today and is charged a huge price difference, fine, (GREAT!) but what happens to the current Resident in the same unit type at renewal? Ask and get a moderate increase, is my philosophy, but I dislike someone telling me this person who has been a valued community member for two or three years (and loyal when there was plenty of opportunities to move to a less expensive apartment during the recession) should now be paying a huge increase to make up the difference between then and now. I am in the minority, I know. I also realize that if the entire market charges X dollars for the same square footage (apples to apples) and no one is offering Specials, then of course you may be able to get away with a huge increase.

“It’s about sustainability and it’s about being consistent,” I said to the experts. I compare each variable of this community to the true comps first and charge according to our perceived value. It works in all economic eras. “I can always increase the rents, but how many people reduce the rents?” They looked at each other. I thought maybe I had grown another head. “I can’t stand having to offer concessions, so this is what we do. We evaluate and remain flexible. It makes no sense to keep rents too low or too high, especially when I will always have residents who are capable of getting a mortgage. That’s just my opinion.”

Nope, I don't think we have done anything other than to learn to ride the waves in the ocean. And we've done it because we just happen to know a little bit about surfing and we caught the Big One this year.

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  Mindy Sharp
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Thanks for commenting, Mindy, and this is a situation I have been trying to get my arms around for a long time. I hear that it is stupid to not charge what the market will bear, but all it comes across to me is short term thinking that squeezes all the profits it can without any regard for long term success. Our industry turns ~60% of its residents every single year. With that ridiculous turnover, why not simply use market rates for new move-ins, and moderate rent increases for existing residents? Why does it have to be an "all or nothing" situation so many times? That approach would yield 60% of residents with dramatically higher rents, and 40% with reasonable rent increases. So short term profits are bolstered, and long term success is still an option.

  Brent Williams
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I agree!!!! That's been my philosophy all along. Sometimes I am accused of being conservative - that rents should be increased a certain percentage, sometimes across the board, etc., but it comes down to what is more important - in the long run - keeping Residents and building a stable community so you don't have to always be turning units or chasing after the dollars. I know it is wonderful to get the rent increases, but doesn't it depend on what is happening in your own area? If people are still not being hired, or not receiving any salary raises, plus the cost of living seems to be rising, how do you justify to your current Residents that they should have to pay $X more .... just because. It kind of goes back to one of your other posts about what do you Managers do for those renewing Residents - are you offering any updates - what keeps your Residents happy to renew? I have truly worked through some difficult circumstances to reduce the turnover from 65% to 42% in a year at a property. I think it is possible to gain a nice profit without the exposure of losing Current Residents.

  Mindy Sharp
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I am a big proponent of doing what it takes to keep a resident happy and wanting to stay. Let's use an example:

Bob and Mary Smith move into a 1 bedroom unit at the current market rent of $1000; they sign a 12 month lease and, based on current occupancy levels at the time of move in, they receive no concession.

10 months down the road, current market trends that the same unit should rent for $1250. Management sends out a rent renewal letter offering them a modest increase to $1175; which confuses them as new residents are receiving $1100 based on current occupancy levels. They complain to management and claim that the rent increase is not fair as other comparable units at nearby properties are renting at $1150 and receiving various specials. They counter with an increase to $1100, but also request a carpet cleaning and some a ceiling fan in the bedroom. This will generate an aditional $1200 in income over the next 12 months.

The management should accept this counter offer because this increase represents a little less than $1000 after the carpet cleaning and ceiling fan is paid for in increased income. As opposed to a unit turn that can cost several hundred dollars to clean, repair and market until reoccupied.

At $1000 per month, this resident generated an income of $12000 for the year.
At $1100 per month, this resident generated an income of $13200 for the year; representing an approximately $1000 increase after carpet cleaning and the ceiling fan were paid for.

At $1150 per month for a new resident, this generates $13800 in income; but will be offset by the costs incurred by turning and marketing the unit until reoccupied; which can be an extended period unless you have a waiting list. In the meantime, this generates NO income, regardless of the current rent.

All of a small increase is better than NONE of a larger increase for any period of time.

I would never dream of increasing the rent on a current resident to the new market level; unless I have documentation...

I am a big proponent of doing what it takes to keep a resident happy and wanting to stay. Let's use an example:

Bob and Mary Smith move into a 1 bedroom unit at the current market rent of $1000; they sign a 12 month lease and, based on current occupancy levels at the time of move in, they receive no concession.

10 months down the road, current market trends that the same unit should rent for $1250. Management sends out a rent renewal letter offering them a modest increase to $1175; which confuses them as new residents are receiving $1100 based on current occupancy levels. They complain to management and claim that the rent increase is not fair as other comparable units at nearby properties are renting at $1150 and receiving various specials. They counter with an increase to $1100, but also request a carpet cleaning and some a ceiling fan in the bedroom. This will generate an aditional $1200 in income over the next 12 months.

The management should accept this counter offer because this increase represents a little less than $1000 after the carpet cleaning and ceiling fan is paid for in increased income. As opposed to a unit turn that can cost several hundred dollars to clean, repair and market until reoccupied.

At $1000 per month, this resident generated an income of $12000 for the year.
At $1100 per month, this resident generated an income of $13200 for the year; representing an approximately $1000 increase after carpet cleaning and the ceiling fan were paid for.

At $1150 per month for a new resident, this generates $13800 in income; but will be offset by the costs incurred by turning and marketing the unit until reoccupied; which can be an extended period unless you have a waiting list. In the meantime, this generates NO income, regardless of the current rent.

All of a small increase is better than NONE of a larger increase for any period of time.

I would never dream of increasing the rent on a current resident to the new market level; unless I have documentation for cause to not renew them. I am more likely to meet them somewhere in the middle; and offer them something that builds value to them.

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  Johnny Karnofsky
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I just ran into a video by Doug Bibby from NMHC that has a very different assessment of the situation. We obviously disagree on some points, but it is always good to get multiple opinions, so it is definitely worth the watch!

  Brent Williams
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Simply put: Greed Kills! What will it do to your net when your vacancy rate climbs after the short term gains?

  Mike Dwight
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I agree with you, Brent. I think the cost of turning and marketing gives you a lot of profit margin for your current residents. If it costs $1200-2400 to turn and market and with vacancy lost included (I picked numbers easily divided by 12)8), then that's $100 or $200 a month less than market you can charge your resident to make the same money as the new one. Give them an affordable raise in the rent and encourage them to stay.

  Donje Putnam
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I've waited to chime in on this one, and I'm glad I waited as Doug Bibby summed it up nicely. Thanks for sharing that link Brent. While I think your concern that rents going up will drive people away is valid in the short run, but the demographics data Doug speaks of is for real. The millenials will help sustain things for all the reasons Doug indicated. We need to also remember that for many owners it's not just about collecting rent month to month, but about increasing the value of the asset. These increases create hundreds of thousands of dollars in valuation. We're real estate investors. Raising rents increases the value of our investments while maintaining occupancy does not. It can be a challenge to balance customer satisfaction with this, but we have a finite number of units to sell. It's not a volume play, rather a valuation play. Balancing satisfaction and maximizing price is the game.

  Mark Juleen
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Thanks for jumping on the discussion, Mark. Talking purely about the valuation aspect for a moment (without accounting for demographic changes), the valuation is only important if you sell, correct? And in that respect, if the market is expected to reverse to some degree, wiping out the rent increases, would you really do a valuation on current income, rather than projected income? My background is in business valuation rather than real estate valuation, but it seems strange that an investor would not account for overall industry market forces and buy based upon the income they would achieve, not the income that is being achieved right now.

  Brent Williams
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Great thoughts, Donje. Thinking only about rent increases without the associated costs doesn't make sense to me. Although I would ratchet up rents to a certain degree with existing residents, just not as much as market.

  Brent Williams
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