According to the U.S. Apartment list, five large cities saw a decline in the median rental rates over the past 12 months: Baltimore, Chicago, Pittsburgh, Portland, and Seattle. No city or region of the country is safe from declining rents. As landlords, we need to track our local market and make adjustments to maintain as high an occupancy number as we can.
When the collapse and resulting recession hit in 2008, rent growth froze. For some regions of the country, any increases were hard to push because people started looking for other means of housing, also call a Shadow Market in Housing. And the shadow rental market exploded. The owners of new and empty houses and condos pulled tenants from traditional multifamily. To be competitive against this situation, management needed to make retaining good tenants along with marketing to new tenants a priority.
When rents continued to fall in 2009 and 2010, there wasn’t’ much to do to increase rents. The country was still reeling from the collapse. With such high vacancy, tenants had plenty of units to choose from and demanded bonuses and incentives which often appeared as a reduction in price for rent.
Fast forward to 2019. Depending on your region of the country, you could make small concessions to getting a renewal, such as a $100 Amazon gift card or a $100 AMEX Cash Card. You could even do a grocery gift card from Kroger or Walmart for renewing tenants to stay another lease term. We usually do a choice of carpet cleaning, painting of a room or even a small capital improvement to get the tenant to stay. Anyone of these things is far less than the cost of turning a unit, dealing with the vacancy and lease renewal costs from your property management company. This typically only works for Class C units.
Aside from improving the tenant experience and getting them to stay in the unit, here are four things to do when you think rents start falling in your local market:
1) Verify the Falling Rates: Look at your competitors in a 5-mile radius by looking at Zillow or Cozy. Have they reduced their rent over the past several months? Keeping an eye on what the local market is doing is important not only if you think rents are dipping but also if they are increasing. One reason they could be making their way up is that your competitors are improving the property and you may not be. Or they may be offering a free 40” TV as opposed to 30 days free (which is much less expensive). If the landlord has a good tenant on the hook, they may cut the tenant a deal and give them an 18-month lease for a slightly lower rent rate. Depending on the asset class and what is going on in the economy, people will be more cost-conscious. For instance, you can offer a $200 gas card as an incentive if gas prices are on the rise. Of course, ‘charm pricing’ is always important as people will perceive a big difference if we list an $800 unit for $795. Keep this in mind as you price your units.
2) Multiply your Customer Service: Taking care of your current tenant basis is important to hold the line on vacancy. This means staying on top of service requests and work orders. Rent growth is already a losing battle when vacancy is on the rise. Don’t compound the problem by slacking on tenant requests. If you are using property management, something which I strongly suggest, they should be on top of the requests. You just need to make sure things are getting done.
3) Build a Marketing Strategy: I’ve put out a great deal of material on the various marketing tactics you should consider when targeting a given demographic. You should also consider what your local market is doing to pull those prospects in.
For instance, if you are in a heavily hit market with an oversupply of 2 bedrooms, you may want to consider turning your 2 bedroom unit into a 1 bedroom by locking or sealing off the door to that second bedroom. This tactic will get you some additional occupancy. You may also consider giving away two months free with a lease with the first and last month of the lease being the free months. You can also add basic cable or wireless internet for 6 months so you can get them in the door.
4) Stress the Urgency with Your Team: As the leader of the group, you need to communicate your vision to your property management and construction team. They need to understand that the goal is full occupancy. You need to outline the plan for the team at large so they understand that keeping vacancy as low as possible is critical. Weekly meetings with each property manager to go over critical issues, cost control initiatives, and new move-ins are also recommended. Keep the meetings to no more than 1 hour and always have an agenda so the property manager has time to prepare.
An economic slowdown or depression will cause people to substitute expensive rentals for cheaper ones, putting downward pressure on rents. History has shown that it would also cause people to move in with family or take on a roommate, further decreasing demand for multifamily rentals. Additionally, anything that makes buying a home more cost-effective will make rents lower as well because people will perceive buying a home as a cheaper option. As houses become cheaper, those tenants will move out of a rental and become homeowners, decreasing demand for rentals.
Anyway, what do you think? Have you ever applied these tactics? Let me know in the comments. I’d love to hear from you.
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