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Is Now The Time To Consider Multi-Year Leases?

NMHC recently posed the question in their newsletter, “Are Apartment Fundamentals Peaking?”  If rental rates are close to peaking, then the best course of action is to maximize the high rents while hedging against a market reversal.  We’ve discussed the idea of multi-year leases in the past, but frankly, they have gotten very little traction because they limit the ability to raise rents due to rising market rates.  As someone who values retention, that thought process makes sense financially, yet makes me cringe at the same time.  That said, as the industry is now seeing incredible growths in rents as vacancies dwindle to under 5% nationwide, it should open up the discussion for “locking in” these strong rental rates. I am not going to estimate when rents will finally peak and we will see a reversal, but as cycles normally go, the growth will eventually stall and probably reverse at some point.  And at that point, if we can maximize those high rents during a down market, we will be doing well.  The obvious benefit to long-term leases is that it locks renters into a rate that will hopefully represent the peak in market pricing, or something close to it.  Additionally, multi-year leases guarantee higher retention rates, which equate to lower turnover costs.  In other words, it ensures higher rents during periods of declining market rates AND improves profitability on the retention side, as well.  The challenge to implementing multi-year leases is to determine when is appropriate to start the program. ......
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