by Paul R. Bergeron III
Apartment communities are effectively communicating this to residents during renewals and are investing the additional revenue into property improvements and are rewarding investors.
Seeing rents rise across the country has given apartment owners and management companies reason to stand up and cheer.
Data from apartment market research analyst firms indicate that the U.S. apartment sector turned in near-record revenue growth performance in the second quarter (Q2 2011). Occupancy climbed 0.7 percentage points during the past three months and effective rents jumped 1.7 percent, taking the total revenue lift for the quarter to 2.4 percent.
“The last time quarterly revenue growth came in at such strong levels was at the height of the tech boom in 2000 and early 2001,” says Greg Willett, Vice President, MPF Research, which tracks industry data for all major U.S. markets.
“That previous peak was driven in large part by huge numbers posted in just a handful of tech-heavy metros, in contrast to the much broader upturn now seen all across the country.”
Average occupancy for U.S. apartments reached 94.2 percent in Q2 (April 1 to June 30), MPF Research reports. That rate is up from a low of 91.8 percent recorded at the bottom of the recent cycle in late 2009, but still below the 95.6 percent occupancy achieved prior to the recession which began in 2008. Typical monthly rent increased to $1,054 as of June. This past quarter’s sizable rent jump accounted for almost half of the total 3.8 percent increase in pricing seen since mid-2010.
Apartment research firm Reis reports that increases in asking and effective rents of 0.5 percent and 0.6 percent, respectively, represent a slight acceleration from last quarter’s increases in asking and effective rents of 0.4 percent and 0.5 percent, respectively.
Improvement in rents nationwide continued in May, according to Axiometrics, another provider of data and analysis on the multifamily housing sector. Effective rents increased 0.70 percent from April levels. Based on results year-to-date, Axiometrics estimates that effective rents will rise 5.9 percent in 2011, which would be the largest annual increase since a rate of 5.8 percent in 2005.
All-Time High In Sight
Most apartment owners agree that the industry is steadily improving, and that Q2 rent rates bring a sigh of relief and polite applause, rather than song and dance. Some suggest that the Q2 numbers simply reflect that owners are getting fair rents from their residents.
Rick Graf, President, Pinnacle, says the current environment of higher rents represents more of a “rent recovery” period than one marked by all-time highs. “We gave a lot of rent back over the last few years and yes we are trying to recover the true value of the unit in the market place,” he says.
A year ago, in the Charleston, S.C., market, one Darby Development property was discounting an $825-per-month apartment to $599.
“Now we are going back to $825 on these units,” says Victoria Cowart, CPM, Vice President of Property Management for Darby Development. “The property does not yet have the occupancy I’d want, but our economic occupancy is on the rise.”
AvalonBay, which, like many publically traded apartment operators has seen its stock price reach a 52-week high during the quarter, says it did away with concessions a while back. It operates mostly high-end apartment communities in coastal and urban markets.
“In the majority of cases, our rents are truly higher,” says Leo Horey, Vice President of Operations, AvalonBay. “Since we have deployed revenue management software to guide pricing decisions, AvalonBay has largely eliminated the use of concessions. Because previous rents seldom included concessions, the new renewal rents reflect a genuine increase in the monthly rent payment to the communities.”
Fred Tuomi, President, Property Management, Equity Residential, says he tracks revenue growth based on year-over-year, same-store growth. “What we are seeing at communities in our core markets (Boston, New York City, Washington, D.C., South Florida, Southern California, Seattle and San Francisco) correlates strongly with what the national apartment data research firms are reporting for Q2,” Tuomi says. “In terms of growth in asking base rents, we’re seeing middle single-digits over last year and the stronger markets now up over 10 percent. The trend of the recovery is still very healthy.”
Tuomi says, for the most part, Equity Residential communities are back to their former peak period (summer 2008). “We’ve regained the pricing power we had back then, but that only gets us back to 2008 rent levels,” Tuomi says. “We have at least an additional 10 percent more to come just to make up for the growth we missed out on during the recession, given the typical annual growth rate of 3 percent to 4 percent.”
Tuomi says that rents in Boston, New York and Washington, D.C., did not fall as much since summer 2008 as other major markets. “Today, they are all showing steady growth. Southern California is still the laggard. It is late to the recovery party, but it, too, has been showing momentum lately and still has about 6 percent more growth to go to catch up.”
“At Greystar, we are seeing rents up across the country in almost all of our markets,” says Greystar Chairman and CEO Bob Faith. “We are seeing rents bouncing off the bottom. From peak to trough, rents dropped from 10 percent to nearly 30 percent in some markets, so rents have to increase by a lot more just to recover. In most cases, we see owners not really pouring money into assets because of the increased rents. They instead are just feeding assets less, or are trying to claw back to pro forma in many cases.”
Willett says that while he has seen fairly substantial effective rent hikes for five consecutive quarters, he agrees that these increases, for the most part, simply fill in the hole that was dug by rent cuts in 2008-2009.
“Although a handful of metros are experiencing new highs in pricing, as of mid-2011, most are basically at the break-even point relative to where rents were in late 2007 to early 2008,” Willett says. “Nationally, we actually haven’t quite come all the way back because rents remain way below previous peaks in a few large markets, most notably all the Southern California metros, Phoenix, Atlanta and Las Vegas.”
Willett says that the use of concessions in the pricing structure is headed downward at a significantly substantial rate. “As of mid-year, we’re showing concessions offered for 36 percent of the product examined nationally,” he says. “For the properties that do have concessions, the typical discount is 9 percent. That’s back in line with the numbers seen in 2006-2007, whereas, at the peak of discounting in late 2009 to early 2010, the figures were 53 percent of the product featuring giveaways and 12 percent for the size of the typical discount.”
A Rent Bump Now, But What About Q3?
The return of job growth, even at muted overall levels, is helping fuel strong apartment demand, Willett says. “While increases in total employment aren’t occurring at the pace [the industry] would like to see, it’s important to realize that young adults, who tend to be renters rather than home buyers, are capturing a disproportionately large share of the job additions. In turn, some who previously went home to live with mom and dad or doubled up into roommate living arrangements are now forming their own households.”
Strong resident retention efforts when leases are expiring also is impacting occupancy numbers, Willett says, because most new renters now translate to additional net demand, rather than replacements for households leaving for other housing options.
“The churn traditionally seen in the resident base just isn’t there at this point,” Willett says. “Very few households are exiting the apartment sector to make first-time home purchases. Even the trade-off from one apartment property to another is down, despite rising rents. Pricing only now is getting back to the levels that were typical prior to the start of the recession in most places. The share of income spent on rent isn’t yet out of line with the historical norm.”
Other than limiting loss of existing renters to purchase, struggles in the for-sale housing market aren’t presently a big influence on the apartment sector’s performance, according to Willett. “Household size and lifestyle preferences largely determine whether you live in multifamily or single-family product. Families who come out of foreclosed homes most often opt for single-family rentals, not apartments. That’s where housing substitution comes into play.”
Reis’ Q2 Trends Report shows that although the recovery in the apartment rental sector continued, the pace of recovery slowed relative to the first quarter.
“This is significant because the apartment market typically strengthens due to seasonal effects during the second quarter as the weather in much of the country improves and the school year ends, both of which facilitate moving,” says Reis’ Senior Economist Ryan Severino. “Therefore, the apartment market recovery was not immune to the changes that occurred in the macroeconomy. Real GDP growth slowed during Q1 after accelerating for two consecutive quarters and labor market data from the Bureau of Labor Statistics has shown a slowdown in hiring in May after a brief period of acceleration earlier this year.”
Severino says that it appears as if these economic developments caused renters and potential renters to act a bit cautiously regarding their leasing and apartment needs during the second quarter. Reis reports that national vacancies fell from 6.2 percent to 6 percent, as the sector posted positive net absorption of roughly 33,000 units. This represents a decrease from Q1 2011 when national vacancies fell by 40 basis points and net absorption totaled roughly 45,000 units, according to Reis.
“We remain cautiously optimistic about the recovery in the economy and the apartment market,” Severino says. “Many of the factors that caused the economy to slow during the first half of this year, such as a dramatic and unanticipated increase in energy prices, a snow-filled winter for a large portion of the country, and the disruption caused by the twin disasters in Japan, are isolated incidents that are likely to have only a temporary impact.
“Moreover, we continue to observe a convergence of positive factors for apartment rentals. First, as the absolute number of jobs continues to rise, demand for housing is increasing, particularly in the 20- to 34-year-old segment of the labor market. However, with the for-sale-housing market still struggling, few of these newly hired young workers have the appetite to commit to buying a home.
Additionally, many will want to wait until they have had some tenure with their current employer or have saved enough money before providing the requisite down payment for a house.”
Despite this quarter’s slowdown, the ongoing recovery and tightening vacancies continue to generate greater pricing power on the part of owner/operators, demonstrated by the continued increases in asking rents. Furthermore, effective rent increases continue to outpace asking rent increases, indicating that concession packages continue to erode.
Severino says that because the slowdown in the economy is likely to be temporary, barring some unexpected shock from the global economy, he expects the recovery to continue throughout 2011. “Vacancies should continue to decline while rents rise at an even faster pace than we observed in the first half of the year,” he says.
With a shortage in new supply for 2011, Severino says Reis expects vacancies to continue to decline throughout the year as households favor the rental market. “Although the improvement in the apartment market will likely spur new construction, any boost from these new units will not materialize until late 2012,” Severino says. He adds that data from various sources already indicates a surge in applications for the financing of construction and development of new multifamily buildings.
Residents Will ‘Shop’For A Drop in Rent
Raising rents at any level and for any reason also can raise issues for onsite staff who are responsible for communicating these hikes to residents.
Willett adds that although most overall U.S. economic news for Q2 was weak, most of that data wasn’t released until the end of the second quarter.
“That makes it too late to impact the attitudes of operators or the renters themselves during the quarter,” Willett says. “Renters’ and owners’ decisions were already made by then, with actions already taken or in motion. But some [apartment owners and management companies] are suddenly nervous now [in July], so there’s a distinct possibility that Q3 results will be disappointing, particularly in terms of rent growth.” Milestone Management’s President and COO Steve Lamberti says that the first step for management is to sell the idea of rent hikes to the onsite staff, empowering them to speak more confidently about the increases. “This aspect of communication cannot be overlooked,” Lamberti says.
Mary Gwyn, Apartment Dynamics, consults with onsite staff and management for many properties. “Whatever approach a team decides to use should be discussed by supervisors with staff,” she says. “It should then be scripted so leasing professionals can feel confident they know what to say and have the answers to potential objections that residents may raise. When informing residents that higher rents are coming, leasing professionals should speak from a position of strength, using ‘closing’ language that assumes that the residents will renew.”
Ken Sherman, Raleigh District Manager, Camden, says his associates talk to the residents about the rent freeze or the minimal increase they may have enjoyed during the previous three years.
“We then stress value and also talk about increases they will find at other communities in our market,” Sherman says.
Mike Beirne, Executive Vice President, The Kamson Corporation, Englewood Cliffs, N.J., says that today’s residents have become sensitized to the issue of rent’s ups and downs.
“One thing we all have learned through the past couple of years is that consumers who rent have become sensitized to owners’ willingness to bargain and that when they did ‘bargain’ that the quality of the product did not suffer,” Beirne says.
“In essence they have gotten a lot for their money and they expect that,” Beirne says. “Secondly, with a population of would-be homeowners gravitating back to the rental market today, they are looking to emulate as closely as possible the qualities they aspired to in the single-family home market. Justifying the rise in rents is simple, but it means a lot more than it used to: residents are willing to pay more for apartment communities that provide superior quality,” he adds.
Cowart says she encourages her associates to show market survey data to residents when discussing the rent hikes. “The residents often say that they will look around, but most often they stay because they discover that they cannot get a better value elsewhere and that our rent is priced fairly, given current market conditions.”
Tuomi says Equity Residential currently is averaging 6 percent increases on renewals. “Some are significantly more, depending on the market and when their current lease began,” Tuomi says. “Most people accept the quoted new rent. However, those that decide to shop the market quickly realize the offers are in line with comparable properties.”
Brad Cribbins, Senior Vice President of Operations of the Southwest and Mountain Regions for Alliance Residential Company, which operates 49,000 apartment homes nationwide, says that sometimes it’s good for residents to shop the market. “It validates the business position our leasing team has presented,” Cribbins says. “We’ve had a number of residents object to an increase at renewal and shop the market, only to return and renew because they have realized the quality of our asset, the cost of moving and the reality that rents are rising everywhere.”
Lamberti finds a similar outcome at many of his communities. “We’ve noticed an increase in residents canceling their notice-to-vacate indication forms as they realize rates are up [in nearly all markets],” he says.
UDR is effectively timing its renewal offers to residents electronically. “Since we began offering online renewals, more than 80 percent of our lease renewals have been completed online, a phenomenal acceptance rate in such a short period of time,” says Tom Toomey, President and Chief Executive Officer at UDR. “At properties with a high percentage of leases renewed online, turnover has been
2 percent lower and asking rents have increased by 3 percent with 90 percent to-95 percent of residents accepting the initial rent increase. Residents can make faster buying decisions and more are choosing to stay with our communities.”
Apartment owners in harder-hit parts of the country are finding higher rents to be a bit more challenging, at times.
Cindy Nissen, Director of Training and Community Relations, Berger Rental Communities, Southeastern, Pa., says her company managed to raise rents approximately 3 percent per year during the recession. “But we are raising that a bit more dramatically this year,” she adds. “Our message has shifted from highlighting the dollars and cents to the value of the entire package, including amenities and services. Prospects are starting to look for those services rather than just searching for concessions.”
Frank Barefield, CPA, CFA, Owner, Abbey Residential, which owns and operates 8,000 apartment homes based in the Southeast and Southwest, says, “If the resident is absolutely price sensitive you will probably lose them because they will downgrade from an A community to a B community or a B to a C.”
Barefield says that although rents are slowly increasing, “the economy is really not improving for most Americans right now, it is just getting tougher to buy a home and according to most articles, it makes more sense to rent versus own in today’s tough economic times.
“Any time you move rents higher than a resident is currently paying, it is very important to have a happy resident,” he says. “This means that you need to be doing all of the little things right during their lease term, not just at renewal time.”
Barefield’s leasing agents give friendly reminders to residents about why they moved to his communities, focusing on apartment size, amenities, location and work commute or local merchants. They also remind them about the reliable customer service they have experienced while living there, for example—providing quick turnaround on work orders or other requests. They also remind residents of the costs of moving—an argument that will always fall on the side of the owners, Barefield says.
“We also need to make our residents feel important, not just upon the initial signing of the lease, and not just at renewal time, but throughout the entire lease term,” Barefield says.
“It also helps to provide a small token of appreciation at renewal time to let them know that you care, such as free carpet cleaning, free paint of an accent wall or maybe a small gift card to a local shop or restaurant.”
Paul R. Bergeron III is NAA’s Director of Communications. He can be reached at 703/797-0606.
No. 1 Market: Showing the Way in San Jose
A fresh coat of paint, immaculate curb appeal and a continual focus on customer service are among the benefits of managing apartments in a market with the highest rent hikes over the past year.
Rents increased in nearly all U.S. markets over the past 12 months, but no area enjoyed a better bump than technology business hub San Jose, Calif., which grew rents by 12.2 percent, according to Real Page’s market intelligence division MPF Research.
Christina Gibbens is Regional Supervisor for Fairfield Residential’s five communities in San Jose, which average 96.5 percent occupancy. She says Fairfield saw a 13 percent to 14 percent boost in its affordable housing communities and an 11 percent to 12 percent increase in its conventional apartments.
“This exceeded our expectations,” Gibbens says. “This is tremendous growth. There was not much job loss in our market—in fact, there were some slight gains.”
She says renewal conversions at Fairfield Residential’s San Jose communities currently are averaging about 60 percent. “Residents might see big rent increases—up to a couple of hundred dollars—but they are going to find those kinds of rates all over our market—including down the street.”
Gibbens says Fairfield Residential counters resident rebuttals with a marketing message that continues to focus on her staff delivering top-notch customer service. “We are letting residents and prospects know that we are there to take care of them and that we have a very responsive staff—that’s the value of living with us,” she says.
Gibbens says the boost in revenue is being used, in part, to “continue to keep our curb appeal spot on.” She adds that any deferred maintenance will get done now, such as replacing any dry rot found and doing more painting next year.
Gibbens, who has worked the past five years in the San Jose region, says she projects more rent growth in the coming 12 months, estimating about an additional 5 percent to 6 percent boost. —P.B.
How Owners Are Putting Additional Revenue to Work
Responses differed between public companies versus private ones and large owners versus small as to what to do with any additional revenue brought by hikes in rents.
•Barefield puts all of his cash flow in his pocket. “The typical developer/owner I know has billions in net worth and no cash,” Barefield says. “That is not the way to operate. I always try to maintain 20 percent of my net worth in cash so that I can get the best financing from any lender and have plenty of liquidity for any unforeseen event. Any maintenance issues on our properties need to be fixed before any funds are distributed, however. Our properties must always be in excellent condition to operate properly.”
• Gwyn suggests that owners invest their additional revenues back into the community. Apartment upgrades help to keep the asset recession-proof, as well as help to justify higher rates, she says. “We tell clients to reinvest in the assets in the good times so you are in good shape in the bad times,” Gwyn says.
• Beirne says revenue should be directed at keeping communities “competitive, energy efficient, and solid in their foundations.”
• Sherman says Camden’s current capital projects are larger than they have been in years. “We are upgrading communities with paint and parking lot resurfacing, making improvements to fitness centers, business centers and clubhouses,” he says. “We also are working on interior rehabilitations, intended to generate even more revenue.”
• Cowart says that some additional revenue goes toward the increase in turn costs due to the increase in occupancy. She says a portion also goes back to owners/investors.
• Graf says Pinnacle is investing in delayed capital projects and restarting renovation projects, on units, in particular, and is positioning assets with capital expenditure dollars and projects that could help gain greater than market rent increases; as not a lot of new assets have come to market recently.
“We are seeing that owners across the spectrum are taking some much-needed cash flow after three years of no distributions or returns,” Graf adds. –P.B.