Though not atypical to multifamily markets navigating recessionary conditions and combating poor rent fundamentals, concessions in the current cycle have been exacerbated by the lease-term transparency available to American consumers immersed in cyberspace. The real-time availability of prices and available discounts has armed rental prospects with valuable data as they enter the leasing office demanding a deal. “The public has so much in front of them that allows them to compare prices, and with the downturn in the economy, everyone is shopping everything,” says Bruce McClenny, president of Houston-based multifamily market research firm Apartment Data Services. “That obviously contributes to concessions, and concessions are like the flu: Once they start in a submarket, all of the communities have a hard time not capitulating. Resistance is a difficult discipline when you feel you have to get your share and that you have to match the market to do it.”
While managing to stabilize occupancies with the use of concessions takes a chunk from effective rents, most multifamily operators have seen little choice when it comes to wheeling and dealing with prospects. Lease-term flexibility and great customer service can be a market differentiator, particularly as renewals play into rent recovery. Yet when it comes to revenue realities, the reigning management mantra is heads in beds. “Our philosophy is that a good resident in the apartment is better than letting it sit empty because we can’t get the rent that we ought to be getting,” says Lane Co.’s Couch. “An apartment sitting vacant for any period of time is lost money. We’re not Sears or JCPenney where if you don’t sell it today, you can sell it tomorrow. Once you lose a day of rent, it’s gone. You don’t get it back.”
Flexible Balancing Act
The good news is that concessions—like occupancies and effective rents themselves—seem to be bottoming out, and experts expect a burn-off to begin in 2010 and accelerate in the following 24 months as market fundamentals swing back in favor of owner/operators. Lease-term flexibility will likely assist in that process as property managers, whether backed by yield management software or not, continue to adopt and utilize unit-specific lease optimization strategies.
“We’ve been offering flexibility with up to an 18-month lease term, and we’ll go all in between. Whatever you want, we will customize it and customize your move-in day,” says San Mateo, Calif.-based Prometheus senior vice president of asset management John Ghio, who points to lease-term flexibility as one part of a larger customer service restructuring at Prometheus that has produced sustained rent fundamental improvements despite the economy. (See “Service Revolution” on page 40.) “One of our brand pillars is effortlessness, and flexible lease terms have been incredibly successful in that regard as we reach out to our target demographics.”
Managing move-in dates and lease expirations will be critical as the market turns. While longer-term leases with locked-in rates can offer security to both renter and property manager in an uncertain economy, they also can retard effective rent growth as markets return. Likewise, a lease expiration matrix with a preponderance of shorter-lease terms needs to be managed carefully to minimize renewal volatility, particularly during slower lease-up seasons. “Flexibility plays well in this environment for both the owner and the tenant,” says Olshan of Passco, who expects lease flexibility to wane as rents recover. “But maintain no more than a 10 percent turnover in any one given month to allow you to properly manage and maintain stabilized occupancy. As pricing power returns, you’ll see a return to eight- to 13-month lease terms from the wider six- to 18-month lease terms. People always gravitate towards the bottom line, and the bottom line coming out of the downturn will dictate that you shorten that flexibility.”
Of course, exactly when multifamily rent fundamentals will exit from the current downturn is still anyone’s guess. Van Winkle describes any level of prognosticating to be little more than crystal ball thinking but joins the industry in its near unanimity when it comes to expectations of a powerhouse-era for multifamily rents sometime within the first half of the decade.
“In contrast to other property segments where our view is that high vacancies will persist and keep rents low for a long period of time, our view on the apartment market is for a somewhat quicker recovery,” adds Muoio of Maximus Advisors. “If you are preparing your portfolio now by looking at your submarket supply constraints, if you are looking at the prospects of local and regional job growth, and if you are preparing for the release of the suppressed [Echo Boomer] demographics, you are right, right, right on target.”
Just hold your breath and get ready.
Service Revolution
Multifamily operators lean on brand and customer service enhancements to improve rent fundamentals in a down economy.
Career asset manager and self-described “math guy” John Ghio knows true bottom-line results when he sees them. That’s why the senior vice president of asset management at San Mateo, Calif.-based Prometheus was understandably pleased when properties in the firm’s beta test of its new customer service platform began regularly outpacing their control group peers in terms of prospect traffic, lead-to-lease conversions, lease closings, and resident retention and renewal efforts.
“When I see the numbers changing because of a customer service effort—and changing to the point where you know it’s not a statistical aberration—I get pretty excited,” Ghio says of the service program that has retooled property tours, guest cards, marketing materials, and resident relations to reflect a more light-hearted boutique and retail approach to property management processes. The 12 Prometheus properties that have converted to the platform have seen an increase in referrals and a 29 percent jump in lease signings versus non-converted properties, including a 40 percent rise in the number of residents who sign a lease on their first visit (only 13 percent of first-time visits close on a lease at Prometheus’ traditional properties).
Boutique and concierge-centric customer service revamps aren’t new to multifamily, but retooling the tenets of traditional property management has been uncommon over the past year or two as the industry attempts to focus on block-and-tackle operating basics.
Prometheus isn’t the only firm reinvesting in customer service and marketing to improve its rent fundamentals. Take Atlanta-based Lane Co., which is leaning heavily on its brand to help improve occupancies battered by the recession.
“We’re going to keep giving excellent customer service,” says Lane president Rob Couch. “Everyone tends to offer the same physical attributes as everyone else. You can manage those sticks and bricks to a certain degree, but this is really a people service business. You want great people who want to take care of equally great people—that’s really what it amounts to. We’ll be doing everything we can do to get the Lane name out there and make sure people know that we are here.”
