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No Rent Increases?

No Rent Increases?

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The next 3 years are projected to have some of the highest rental increases in multifamily history.

So, what if an apartment community guaranteed no increases for 3 years, or 5 years, or for the entire time a resident stays?  Insane?  Maybe not.

Right now I think residents at most communities are tired of being beat up by rising rental rates. Many of them don't have a choice, can't really afford to move, and certainly can't or choose not to buy right now.

The multifamily industry is capitalizing on the collapse of the housing market, and in my opinion, taking advantage of people who for one reason or another can't purchase, can't afford to move, or just simply don't like change.

I've seen projections from large REIT's recently showing incredible occupancy and rent increases over the next few years.  But, what would happen if a company or community decided not to take advantage of its residents, and lock prices in for the next 3 years.  Perhaps loyalty to the residents would be reciprocated.

I think you would attract some long term residents.  Over the next year turnover would be reduced to those moving out of town (but maybe to a community owned by the same company).  How much money would an apartment community save by not having to turn over apartments?  Or having long term residents that were loyal and paid rent on time?

Let's do some math.  Let's say conservatively a community of 300 apartments loses 30 residents each year because of raised rents.  Honestly, I think that number is low because most residents won't give this reason.  Let's estimate that on average a turnover only costs $1000 in down time, repairs, paying your turnover crew, etc.  This doesn't take into account money spent bringing in a new tenant, advertising, admin set up, and other costs.  That's $30,000 in turnovers.

Ok, so the other 240 occupants (assuming 90% occupancy) get their rents raised by $50 per month.  That's $144,000 in increased revenue.  Seems like a no-brainer right?  Go with increasing rents.

But, what if because of your loyalty to your residents, they told their friends about the 3 year lock.  And the word got out, and people were clamoring to get in.  Maybe you could even start the rent a little higher than current market rates.

What if occupancy increased by 5% and new move ins were paying $50 more than market?  Assuming your average rent is $800 per month (now $850), your increased revenue is $153,000 (assuming a 12 month lease)!  And you're going to save $30,000 in turnovers!  What if occupancy went to 98%?  Yikes, REIT's don't like occupancy that's too high, that means they could have raised rents!

Now of course you have to plug your own numbers in and see what happens.  Maybe you wouldn't come out ahead.  Maybe that's OK.  Maybe it's time to put people ahead of profits.

What are some other intangible benefits that would come from this?

Marketing is about doing something remarkable.  See more at HowToMarketApartments.com.

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Aaron Lynch

Aaron Lynch

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  2. #5747
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Aaron.. I couldn't disagree with you more. Put people before profits.. I'm sure you mean well but as a property owner that is not something that I would want to hear from someone managing my property. You obtain loyolty by giving 110% to your residents.. you exceed their expectations.. I'm sure if you take a poll of renters the large majority of those residents understand why rental increases occur and do not hold it personally on the community. If you increase within the comfort zone of no more than 4% it shouldn't cause too much of a sting to the residents...

If you crunch the numbers holding rents for three years really hurts a business productivity.. check out a blog I wrote last February to express the other side of this arguement...

http://www.multifamilyinsiders.com/home/multifamily-blogs/how-bright-is-the-light-at-the-end-of-the-tunnel.html

In the end this is a business and customer loyolty is not something you can purchase by not giving rent increases.. it's given by treating them with respect, letting them have a say in where the money in spent, and knowing that their homes are just as important to you as they are to them. You won't get much customer loyolty when there is no money to fix repairs, hire respectable employees, or pay utilities.

  Chrissy Surprenant
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  2. #5748
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Eric Brown made this point back in March.
[url]http://blog.multihousingnews.com/ontheground/on-the-ground-with-eric-brown-why-are-you-poking-your-best-customers-in-the-eye/[/url]

Here's my rebuttal.
[url]http://markjuleen.com/2011/03/23/why-would-you-leave-money-on-the-table/[/url]

I'm all for customer satisfaction and creating enjoyable experiences for people. However, we made the biggest customer satisfaction mistake when we devalued our properties and let our customers believe their apartment was worth less than it should be. We set the wrong expectations back then and now we're paying for it. This isn't about greed for many. It's about digging out of a hole. We need to get that value back and it's prudent to do it today when the market is peaking for demand.

The customer experience and decision to renew doesn't come down to a single transaction. Give them a great living experience throughout and the $30-50 rent increase seems more reasonable. You're also setting the expectations that increases do happen for the following years. We have a finite number of units to sell, and to be more profitable we can't get it from volume. Rent increases are a part of this business. If you want to retain your customers by using price as a strategy then I believe that's no different than offering a concession up front. You'd still be playing a price game with them, and I don't believe price based marketing is a winning overall strategy.

Kate Good provided some great tips to get your increases in a blog post just today.
Check it out. [url]http://kategoodblog.blogspot.com/2011/10/8-tips-to-increase-rent-for-new-and.html[/url]

  Mark Juleen
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  2. #5749
This comment was minimized by the moderator on the site

Eric Brown made this point back in March.
[url]http://blog.multihousingnews.com/ontheground/on-the-ground-with-eric-brown-why-are-you-poking-your-best-customers-in-the-eye/[/url]

Here's my rebuttal.
[url]http://markjuleen.com/2011/03/23/why-would-you-leave-money-on-the-table/[/url]

I'm all for customer satisfaction and creating enjoyable experiences for people. However, we made the biggest customer satisfaction mistake when we devalued our properties and let our customers believe their apartment was worth less than it should be. We set the wrong expectations back then and now we're paying for it. This isn't about greed for many. It's about digging out of a hole. We need to get that value back and it's prudent to do it today when the market is peaking for demand.

The customer experience and decision to renew doesn't come down to a single transaction. Give them a great living experience throughout and the $30-50 rent increase seems more reasonable. You're also setting the expectations that increases do happen for the following years. We have a finite number of units to sell, and to be more profitable we can't get it from volume. Rent increases are a part of this business. If you want to retain your customers by using price as a strategy then I believe that's no different than offering a concession up front. You'd still be playing a price game with them, and I don't believe price based marketing is a winning overall strategy.

Kate Good provided some great tips to get your increases in a blog post just today.
Check it out. [url]http://kategoodblog.blogspot.com/2011/10/8-tips-to-increase-rent-for-new-and.html[/url]

  Mark Juleen
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  2. #5750
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So much to say about this blog! Thanks for sharing, Aaron!

1) Even if you kept rents stable, you still have people who would unavoidably move, and you could still raise rents on them. So increases could be achieved beyond the 5% growth in occupancy you mentioned, while still maintaining a rent lock for everybody else.

2) I think you could offer a middle ground where you raise rents partially and then allow them to lock it in. Post some quotes about how the industry's rents are going up over the next several years, and they will still see the rent lock as favorable, even with the partial increase.

3) There is one element that simply can't be quantified (yet) that should be applied, and that is the effect of stability on the property. For example, we always talk about how difficult it is to create a sense of community, but we also deal with 60% average turnover. How do people create meaningful connections when everything is always in flux like that? So when you lock in a large number of people, how does that impact the culture of the community for YEARS to come, beyond even the locked-in period?

4) You are underestimating turnover cost. National numbers often come in between $3,000 and $4,000 per turn, and even in a place with low rents like Houston, it will still be $1,500. That said, I believe there are still some fixed costs included in the turnover cost, so even if you removed all move-outs, I think there would still be some cost, but it would still be higher than $1,000 per turnover. In other words, the cost savings is much more than you estimated for.

  Brent Williams
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  2. #5751
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Aaron,

Where I believe there is merit in your thought process of bringing value to an asset through working with (even better, for) your residents, I think you are ignoring a major reason why people own real estate. It is not necessarily for the NOI produced at the end of any period as much as it is the capital appreciation of value in the asset. That value is increased primarily through the action of raising rents, especially in the high occupancy thresholds you are describing.

Increasing values are why people invest in real estate to begin with. Without the possibility of increasing rents and as a result, the value of their asset, property owners will look to the only other way to make their necessary returns, by cutting expenses significantly. Chrissy already addresses the issues associated with that tactic very well above.

In your example above if the asset sees an increase in revenue of $144k, when taken at a CAP Rate of 6, the increase results in roughly a $2.4 million increase to the property that year. If you continue the process and achieve the same increase in year two (another $2.4 million) and in year 3 (another 2.4 million) for a grand total of increased value of $7,200,000.

If we take your scenario of locked rates for the next 3 years and the achievement of a 5% occupancy uptick, we have capped out our potential value increase at $2,550,000. Leaving over $4,600,00 in potential value on the table!!

In the end our fiduciary responsibility is to the ownership of the asset. The added value created by these rent increases is far to big to ignore. That however does not excuse us from our responsibility to our residents to ensure that we are providing them with the best possible home and service each and every day.

Bring value through the people you hire and the service you deliver and you will be able to achieve both rent increases and an appropriate resident retention level.

  Andrew Bowen
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  2. #5752
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Economics! The answer is somewhere in the middle at the "equilibrium" rent increase amount. So, I neither agree nor disagree. I would begin with a marginal analysis and try to determine or estimate or theorize the number of residents you will lose with each dollar you increase rent. If you increase by something astronomical like $1000 a month, you're likely to lose ALL your residents. If you increase by something miniscule, like $1.00, you probably won't lose any residents (at least not any solely because of the increase). There's a magic number somewhere in the middle where you maximize the benefit of a rent increase and have the fewest losses in revenue.

So, in a sense, what Andrew is saying as he sums up his comment "Bring value through the people you hire and the service you deliver and you will be able to achieve both rent increases and an appropriate resident retention level." is spot on. Find that balance. It will never be either/or that will produce the best revenue.

  Felicia Norman
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  2. #5753
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I haven't had a chance to read the links Mark provided yet, but to respond to Andrew, why don't you factor in turnover cost? I actually calculate $162,000 in increased rent if you assume the community will maintain 90% occupancy.

But let's factor in the difference in turned units: I could be remembering incorrectly, but the percentage of people that simply cannot be saved is 1/3 of the total turnover. In other words, if the industry turn rate is 60%, then we can only hope to save 2/3's of those leaving, because the rest are unavoidable. So what does turnover look like with rent increases versus without?

With rent increase and using industry averages, you would anticipate 162 units (60%) plus an additional 30 units using Aaron's assumption, which means 192 total turns. Without rent increases... If market rents are really going up that fast, you have to assume this "marketing" approach will be highly effective, retaining almost all residents who could be saved (meaning we would only lost 20% versus industry avg of 60%) - let's be a little conservative, however, and say it's higher at 30%, which means 81 turns. The difference is then 81 turns, and at $1,000/turn, we are at $81,000. (This is very conservative considering national turn cost is $3,000 or more)

So now we have cut the benefit in half, and haven't calculated two more things: 1) The people who left (the 30%) we can now charge the higher rate for, and 2) The increase of occupancy of 5%.

1) The increase in rent for the 30% equals $48,600. (30% X 270 X 50 X 12)
2) The increase in rent for the 5% equals $153,000. (5% X 300 X $850 X 12)

So now we have recouped ALL the rental gains, and have actually came out on top by $120,600 when not raising rents. That's only one year, of course, but it does show that there is more to this calculation, unless I am horribly off on my numbers (which I might be!)

  Brent Williams
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  2. #5754
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Chrissy - Thanks for disagreeing with me, I always appreciate another look. I have been all three, a property owner, property manager, and a resident. I've had to talk people through some ridiculous increases that were well able to pay, and others through small increases that weren't able to budge another dollar. My point here is that you can get the best of both worlds. You can put people first (create good will) AND increase revenues, all while decreasing expenses. When you put people first and connect with them in "community" they are more likely to stay (which is good), less likely to complain about minor issues, more likely to figure out a way to pay, and are usually willing to help out around the community.
I agree with Brent, turnover is an epidemic, and while some can't be helped I believe community is the answer. If residents feel like the belong, like they're wanted, and that their needs and desires are being met by their neighbors and the staff, why would they go anywhere else? I'm only suggesting keeping rents the same because money is very near and dear to most people's heart, and to them it feels like you care.
Increasing occupancy and maximizing rents are important, but equally important is resident retention and creating good will in the community (inside and outside).
As a property manager and property owner I want to shut my ears to the wants of the residents and focus on my own, but as a resident I think differently. Isn't that what marketing is about, finding a need and filling it?
This is a people business, like it or not.
This is obviously a theory, but I'm working on a few case studies right now

  Aaron Lynch
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  2. #5755
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In the end, Aaron, I don't know if your plan would work financially - too many variables using too many industry averages to really get a feel for it. But what I do like is throwing out conventional wisdom and looking at everything completely fresh. Instead of seeing that everybody else is gearing up for rising rents, I like the idea that you consider that it may not be the best option. And by thinking through situations that are vastly against the grain, it opens up for options that may not be the extreme, but some derivative of it. I like to think that Multifamily Insiders is a giant think-tank for that type of brainstorming - throwing out conventional wisdom, see what comes of it, and in the end, we might end back up at conventional wisdom, but at least we understand the facets of the decision even better. I appreciate you throwing out a bold idea!

  Brent Williams
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  2. #5756
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Aaron... I couldn't agree with you more about this being a people business.. the most successful communities are that way because of great word of mouth. I crunched some numbers for you just to kinda let you "see owner" for a second and see why your idea would not be good for the owner.

The reason is the amount of loss in that one apartment is tremendous by not raising rents. Every year you don't raise rents you are possibly losing up to 4% so if we use your scenerio at $1000 you would have a rental increase of $40.00 per month after the first year which is a loss of $480.00. The following year you would lose an additional $81.60 Per month for a loss for the second year of $979.29. The third year you are losing $125.28 per month or $1503.36 for the year.. all together by not raising the rents for three years you are taking a loss of $3087.93 that you will never regain... and you will continually throughout the life of that lease never recuperate your losses.. now if you take that at his 30% vacancy you are looking at a huge number! If that community has 300 units and you did that on all 30% which would 90 units you are looking at a loss of $277,913.70 within three years and chances are they aren't gonna stay anyway...

I agree with Mark in basically everything he said infact again I have wrote several blogs about it on this site about how important it is to get our reputations back and stop pretending like this isn't a business to make money and being fearful of asking for what your property is worth. We need to grow our backbones again in this world and stop thinking we are second best to purchasing a home... we need to remind the people of the benefits of renting again and stop treating renters like they aren't as good as home owners! I think I have my next blog topic!! heehee

  Chrissy Surprenant
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