“The whole universe of potential home buyers shrunk because of bad credit and availability of loans, and for the year we had 3.4 percent effective rent growth,” says Mike Hefly, director of asset and property management for Atlanta-based Wood Partners. “Our actual rent potential in 2010 was flat—that is all burn-off of concessions. But to put it in context of how the growth accelerated, the trailing six months at January 2011 annualized was an effective rent increase of 5.1 percent.”
Push it Real Good
Special Effects
Rental revenue seems to be in a steady growth cycle.
In an industry where everything is cyclical, it’s no surprise that rents are up one year and down the next. As apartment marketers struggle to match comps and convert prospects, asking rents don’t always tell the true story. Effective rents (rent levels after concessions and specials) tell a truer story of rent growth. Despite a relatively volatile economic climate over the past decade, rents for multifamily assets in the top 20 metros have increased slowly but surely (see chart at right). Starting at a 2003 fourth-quarter index year, Dallas-based Axiometrics has tracked those metro highs and lows over the past seven years to paint a succinct portrait of dependable sector gains. For example, eight of the largest Sun Belt rental markets (see graph) show signs of steady growth in the past four quarters.
The resulting occupancy in a market devoid of concessions puts 2011 apartment property managers in a vacancy sweet spot allowing them to aggressively raise rents on both renewals and new lease-ups, provided they’ve got the guts to push for a premium. After two-plus years of economic malaise and hard-bargaining prospects, leasing agents could be slow to recognize—or believe—that they’ve got pricing power on their side.
“One of the toughest things to do at the community manager level is to anticipate that things are going to get better when your experience over the past two years is that things are only getting worse,” Oden says. “It is hard to get rid of lingering concessions; it is hard to push rental rates on certain floor plans. It is just against the human experience to get your teeth kicked in for two years and then all of a sudden think that the supply–demand scenario has shifted, and you suddenly have pricing power.”
Palo, Alto, Calif.–based Essex Property Trust, too, adopted an “occupancy first” strategy as rents began to fall during the recession. “Now, we are in a different market where we think it is important to focus on rent growth as opposed to occupancy,” says Essex CEO Michael Schall. “So we are trying to regear the company to be willing to accept more vacancy, although not a lot more vacancy. If you push occupancy into the 93 percent range, then typically rents are going down, not up. You eventually hit a point of diminishing returns on that trade-off.”
