Apartment experts discuss pricing strategies that will keep owners happy and give prospective residents reason to smile.
In a Phoenix apartment market that’s been particularly challenging for apartment owners during the economic recession, concessions have reached a startling level. Some apartment providers have seen their competitors give away up to five months of free rent on a 12-month lease.
While the situation in Phoenix may be extreme, and while some markets show signs of improvement, the practice of offering concessions—special offers in which new residents can live a certain number of weeks or months rent-free after signing a lease—remain a fact of life in many markets throughout the country. According to statistics from Realty DataTrust’s VaultWare, which automatically posts users’ rent rates to multiple listing sites, 43 percent of communities as of April 22 (down from 47 percent in January) are promoting special offers ranging from the waiving of application fees or security deposits to a month of free rent (the most popular special).
Opinions vary among apartment operators about when, where and by how much communities should offer upfront concessions to new renters. Some apartment providers say concessions can be a quick and effective way to fill a community with high vacancy while keeping rent rolls higher in the long run. Others say that today’s renters are simply looking for the lowest net effective rent they can find and that upfront concessions are too blunt of a tool to fill vacancies.
Considering all of the implications of rent concessions—including identifying what both prospective residents and apartment owners are looking for—can help apartment managers decide on the pricing strategy that’s the best fit for their community.
What Are Prospects Looking For?
Apartment companies offer concessions for a simple reason: They help rent apartments, says Kate Good, Sales and Marketing Solutions Expert, KateGood.com. Good recalls one instance at the end of 2009 that starkly illustrated the issue.
“I had a client who held back on concessions and saw future occupancy very quickly drop 6 points in a matter of 45 days,” Good recalls. “The reason is their competition got more aggressive with concessions.”
Indeed, in certain markets and for certain properties, concessions are virtually a must to attract residents, says Richard Roos, Vice President of Finance and Operations for Houston-based owner and operator Venterra Realty.
“There is considerable variability in the level of concessions within major markets and even within submarkets” he says. “But at most of our lower-profile communities [across all markets] and our communities in submarkets still dealing with the onslaught of new construction [especially in Dallas, Houston and Atlanta], we’re doing a lot more concessions. If competitors are doing it, it’s really hard to buck that trend.
“Waiving move-in prorates [the rent due from the date a resident moves in until the first of the following month] has become a necessary requirement to compete on occupancy at lower-profile communities where residents are so focused on price versus overall value.”
Concessions have become such a way of life in some submarkets that residents in those markets will expect a concession before they sign a lease, says Robert Hicks, Vice President of the Southwest for Alliance Residential, where he is responsible for 13,000 apartments in Las Vegas, Phoenix and Albuquerque.
“People can walk in and say, ‘How much in concessions are you giving away?’ ” Hicks says. “You may have to use the word concession to get it done.”
But while that mindset may pervade some markets, Hicks says most residents only care about their own bottom line: How large is the check they need to write each month? To market to those dueling motivations, a combination approach—a lower monthly rent and a small upfront concession—can be effective, he says.
Equity Residential, a public apartment REIT with 495 communities in 23 states, has taken a slightly different approach, choosing to eschew concessions at nearly all of its communities.
“Our philosophy has been to sell net effective rent, period,” says Mike Manelis, Senior Vice President of Property Operations for Equity, with responsibility over yield management.
“With the integration of automatic ILSs [internet listing services] and with the pursuit of true online leasing, concessions cloud the issue,” he explains. “Net effective price is being transparent. Net effective rent puts you at the top of the ILS because it is your best price.”
Even communities that offer concessions often opt to display their net effective rent on ILSs so that they can be included in lower rent-range search criteria, says Mike Cornell, COO of Realty DataTrust, maker of VaultWare.
Whereas concessions discount total rents by large chunks at a time—4 percent or 8 percent right away, potentially more than necessary—Equity uses yield management to lower net effective rent by half a percent or 1 percent at a time, allowing the company to find a price that will attract renters while maximizing income.
While Manelis agrees that there are pockets of the country where customers demand a rent special, he says communities must know how to respond to those calls and sell the community’s total value.
“You’ve got to understand how to articulate that,” Manelis says. “When a customer asks for a special, we note the value of our net effective price relative to current market conditions.”
After gaining confidence in the strategy, Equity now has fewer than 20 properties that have rent concessions in place, including lease-ups and a couple of communities in highly concentrated lease-up markets. Communities that do offer concessions allow residents to choose to take the concession upfront or amortize it over the course of the lease. Many residents choose the lower monthly payment, further supporting the company’s policy.
“There’s strategic value to concessions if it’s done appropriately, but those instances are few and far between,” Manelis says.
Strategize With Owners
Making the offer that’s most attractive to prospective renters isn’t the only factor apartment operators must consider when offering concessions. Managers must consider what the owner of the community wants, as well.
Offering upfront concessions to gain occupancy might make the most sense for some owners, especially if they’re looking to sell the community in the near future, says Venterra’s Roos, whose company owns 11,000 apartments in the Southeast and Southwest.
“The one benefit is that it allows you to keep your rent roll higher,” he explains, because after the free weeks are done, the rent jumps back to a higher rate. “If you’re looking to sell in a year or two, your rent roll can recover quicker and you can put yourself in a better position to maximize sales proceeds.”
Upfront concessions also can help at renewal time, Hicks notes. If the rent jumps back to a higher rate after the concessions are through, the manager won’t need to ask for as large of a rent hike at renewal time.
Manelis points out that as long as a community is competitively priced, renewing at a higher rate shouldn’t be a problem. “If that’s the market rate, residents won’t be able to find a better value,” he says.
While offering upfront concessions may make sense for some owners, other owners may have compelling reasons not to offer a special. Providing two months of free rent upfront on a lease wouldn’t make sense to an owner whose primary concern is cash, Hicks notes. “You’re seeing cash flow diminish for those 60 days,” he explains.
Roos says the collection risk is the primary reason his company has stayed away from upfront concessions in better times. An unscrupulous resident might try and live in an apartment during the rent-free period and then skip town once the rent is due. Most leasing agreements provide the owner with recourse to collect the concession back if the renter leaves early, but it can be difficult to collect those back payments.
The concession strategy that best fits each community will balance the needs of the community’s owners with the pricing structure that will attract residents.
Jeffrey Lee is NAA’s Manager of Communications. He can be reached at jeffreylee@naahq.org or call 703/797-0647.
When and Why: Formulating a Concessions Strategy
Because rent concessions’ usefulness can vary depending on the market conditions and the community’s owner, sales and marketing expert Kate Good says there’s no approach that will work for every community. “I think we should study individual market conditions and individual owner needs and come up with an option that will work at each property,” she says.
Alliance Residential works to tailor its strategy for each community by researching the market and communicating with its clients, says Robert Hicks, Vice President, Southwest.
“We try to keep owners and clients educated on what’s happening in the market so they can keep us educated on what their goals are,” he says. “Clients have different goals and different structures. It can be night and day between what clients need. Do they want valuation? Do they want cash flow? Do they want to tee up the property for disposition?
“We have daily communication, keeping their goals in mind on what they want to do with the asset.”
Training the sales team has been a critical differentiator in Equity’s efforts to move its communities away from concessions, says Mike Manelis, Senior Vice President of Property Operations. “With some properties, we’ll say, ‘I understand what you’re competing against. Let’s try and sell our one-bedroom apartment’s net effective price against the market place. Explain why, on a net effective basis, our extra $50 over the course of the lease is worth it.’
“There’s got to be a new thought process on this,” Manelis continues, “and it starts with educating the sales force on how do you sell net effective rent against concessions. What we have found is that if you are truly competitive with net effective price, the consumers are OK with that. If you’re not able to adjust your sales pitch to compete against a concession, you’re killing yourself.”
As part of the effort, Manelis’s team has had discussions with communities still using concessions to find out why they’re using them and what they hope to accomplish, and encouraging them to eliminate the concessions after they accomplish those goals.
“When people use concessions, they forget why they’re using them and they forget to dial them back,” Manelis says. “Our process ensures we’re constantly reviewing that objective. Once it’s accomplished, how do we wean ourselves off of it?”
Switching away from concessions can take a lot of energy and focus, Manelis acknowledges. But giving it a try for some apartments could help ensure that managers are maximizing the income of their communities. –J.L.
Archstone Profits Through Call Center
Even in an environment where many apartment managers have had to lower rents or offer concessions to fill their communities, one large apartment owner has found a way to raise asking rents by translating better prospect phone call response rates into more leads.
Archstone, an apartment provider with 83,000 apartments in its portfolio, conducted a nine-month test of the financial impact of using a service to answer prospect phone calls in conjunction with revenue management software. The results were published in a white paper by Stephen Lefkovits, President of Joshua Tree Consulting.
The test, conducted January 2009 to September 2009, examined 20 communities that used the call center service (test communities) and 20 that did not use it (control). All of the communities used the revenue management software.
Archstone found that by answering more than 98 percent of prospect phone calls, compared with 50 percent to 60 percent at the control communities, the call center captured and converted new leads from existing marketing sources—the company purchased no new marketing. Guest card appointments rose 53 percent at the test communities, compared with 21 percent at the control communities.
The company also found that with granular insight from its revenue management software, it was able to translate those increased leads into higher asking rents and greater revenues per unit.
Move-in rents rose 0.1 percent at the test communities (in a recessionary environment) compared to a drop of 2.3 percent at the control communities, resulting in revenues per unit increasing 0.9 percent at the test communities and falling 0.6 percent at the control communities.
The white paper concludes that the test results contradict industry thinking that new or excess demand in fully occupied communities is wasted because the community has no ability to raise rents in a competitive market. Extrapolated to a typical portfolio, the report predicts that companies could generate additional revenues of $45,000 to $67,500 per community with an annual call center investment of $9,600. –J.L.