Executive Summary
When a sudden vacancy increase occurs, most apartment communities turn to short-term solutions such as reducing rent, offering specials, or increasing their marketing spend. But how can you ensure this doesn't happen again? A strategic process for earning more lease renewals makes it possible to stay ahead of the ongoing vacancy game. In this resource, we'll focus on two key components—pricing and lease terms—and how you can use them to develop renewal strategies that make residents feel more comfortable about extending their leases, helping your communities maximize revenue with consistently strong occupancy.
Read this resource if you're interested in:
- Learning how to retain more residents and reduce your turnover rate.
- Creating a renewal strategy that allows you to have the right number of move-outs occur at the right time, minimizing excess vacancy.
- How to approach the pricing or lease terms you offer in renewals.
A Strategic Renewal Process Can Help Maximize Your Apartment Communities' Revenue
Susan, a property manager, contacted her regional manager at the start of the month in a frantic panic. She had a problem. It was November, and 12 residents were moving out of her 198-unit community at the end of the month. Traffic is consistently slower in the winter, and she knew she had to do something urgently, or she would have extra vacancy until traffic picked up again in the spring.
Have you been there? In this situation, most communities will quickly turn to short-term solutions such as reducing rent, offering specials, or increasing their marketing spend to drive more traffic with digital ads. But how can you ensure this doesn’t happen again? Is it even possible to stay ahead of the ongoing vacancy game?
We are here to help you see that to maintain a strong occupancy year-round and prevent extra turnover during seasons of low demand in your apartment communities, you must have a strategic and consistent process for handling lease renewals. Minimizing vacancy isn’t a one-time quick fix; it should be monitored closely year-round, and certain cues should lead you to when there is a small problem so that you can fix it before it becomes a significant problem. There are policies you can put in place, particularly regarding pricing and lease terms, that will help you overall in the long run.
Creating well-thought-out renewal strategies that last all year long will allow you to have the right number of move-outs occur at the right time, which in turn will make it easier for your team to shorten the number of average days that occur between one resident moving-out of a unit and a new resident moving in. Ultimately, this will maximize your revenue because you're minimizing vacancy in the long-term, and you are saving money on digital ads in seasons when it is not as imperative.
This resource aims to show you how to design a successful and logical renewal strategy for your apartment community that treats residents fairly while protecting your bottom line. Having a secure strategy will be a pivotal and foundational first step in allowing minor changes to dictate your overall leasing performance. When small cues signal that leasing performance is off, you should be able to fix it with these recommended strategies beforehand to save the headache of a more significant future problem. We'll focus specifically on diving into two primary strategic components: the pricing and lease terms you offer for renewals.
Before we start, it's essential to acknowledge that people will leave your community no matter what you do. Perhaps they got a new job or are getting married. Amicable separations like these are acceptable and will take place.
If you struggle to retain residents and your turnover rate is consistently high, you may have a deeper underlying problem. While you can't control what every resident ultimately does when their lease expires, you also have some control over their living experience.
You can make residents feel more comfortable about extending their lease with you when you're:
- Making sure maintenance requests are handled quickly and in one visit.
- Fostering a sense of community spirit that makes them feel connected and welcome.
- Upgrading your amenities (like purchasing new gym equipment) makes it harder for them to leave an apartment community that has what they need, like yours.
These are crucial ways to interact and care for your community’s residents well. Although you can work at each of these things, ultimately, renewal strategies must be established to protect your profit and create a near-seamless transition between residents.
Please follow along as we walk through how to develop an effective renewal strategy.
Pricing In Renewals
There are two philosophies you can follow when it comes to pricing in renewals. You can charge whatever the market rate currently is when a lease expires, or you could charge less than or equal to the rent the resident had been paying.
It is essential to consider your community’s leasing performance when choosing between those two philosophies. You don't want the pricing in your renewal strategy to be detrimental to your occupancy or revenue.
Should you decide to charge the market rate, there are a couple of considerations to keep in mind. First, you need to understand the rent for the unit that's up for lease renewal if it were actually vacant.
For example, the current tenant paid $1,200/month, but the market rate went up 20% then. That means a new resident would have to pay an increased rent of $1,440/month for that same unit.
Charging the market rate to an existing resident isn't unethical, even though it's more than what they were previously paying. The key in choosing this philosophy is you must also be charging new residents that same higher rate and not charging new residents less to sign more leases.
Offering an existing resident a higher rent rate than a new resident would create negative blowback, and word will spread. You're almost guaranteeing a move-out, which will hurt existing residents' impression of your apartment community. That could lead to an increase in bad reviews, which could hurt your ability to attract those new residents in the first place when they see those reviews while searching and down the line.
That's why we firmly believe that it's best to offer an existing resident less than or equal to the same rent rate as a new resident would pay if you're charging the market rate.
If you choose to charge the current market rate at renewal, be prepared to see an increase in your turnover rate—especially if the market has gone up. To safeguard your community from experiencing huge turnover, we'd recommend trying the following:
- Set a cap for how much you're willing to increase the rent rate for an existing resident. This maximum is arbitrary—maybe you choose to account for inflation plus another 3%, so if inflation is 3%, then this would be 6%. This way, if the market rate has gone up 10%, your cap dictates offering a slightly better deal, which could be helpful if you're trying to avoid turnover. You could also set a monetary number, like you will only charge no more than $50 above a resident's current rate.
- Keep all existing residents on rental rates that are below market levels. Consistently offering existing residents a better rate may be the difference in getting more of them to agree to a lease renewal. It saves you time and money as you don’t have to deal with as many move-outs on the horizon.
The other philosophy, of course, is much easier to apply. Offering an existing resident a lower rental rate than what they're currently paying is a reward for their loyalty, and there's nothing wrong with choosing to do so.
In fact, offering renewals below the current resident's rate is the brightest move any apartment operator can make when rental rates fall. You win when you retain more residents in a down market by avoiding the costs of turnover, vacancy loss, and marketing for those vacant units.
But you still have to be careful not to offer too low of a renewal rent price. While you may be able to retain more residents and decrease your turnover with such a tactic, you're ultimately hurting your revenue.
To maximize your community's revenue, here's what we'd recommend:
- First ask yourself if a resident is paying at or above market rent.
- If yes, offer the resident the current market rent in the renewal, which would be the same or lower than what they were paying. For example, if they were paying $1,500/month and the market drops to $1,400/month, offer $1,400.
- If the answer is no, then charge the greater of their current rent or 2-3% below the market rent. In this scenario, we're assuming the market rate has increased, and you're choosing to charge a renewal rate below it. In this scenario, your resident was paying $900/month, but the market went up to $1,000/month. You'd set the renewal rate to around $970-980/month (2-3% below market rent) because it's greater than their current rent of $900/month. In another scenario, the resident pays $990/month, and the market rent is $1,000/month at renewal time. If 2-3% below market rent is around $970-980, we'd recommend charging the resident the same rental rate as they had been paying because $990/month is the greater of those two.
These pricing philosophies work best when the tenant is seeking to renew their lease for another 12-month term. However, your strategy should change depending on if the tenant is interested in shorter or more variable lease terms.
Finding a suitable middle ground between your apartment community's and the resident's best interest can be tricky. That's what we'll focus on next.
Lease Terms In Renewals
When establishing the various terms you're willing to offer in a renewal, the ultimate goal is to position yourself to have more leases expire during seasons when your apartments are in high demand.
You can set multiple lease renewal terms—month-to-month, two, six, eight months, and on down the line—but that doesn't mean you should offer all. We'd recommend offering each resident no more than three term options in a renewal because too many options could cause paralysis by analysis.
Which three options you offer are an integral part of the strategy. You first need to have an acute understanding of your apartment community's unique seasonality to provide lease terms and pricing in renewals that protect you from having more move-outs occur at slower times of the year. This blog post discusses using traffic data from your apartment community's website to determine your seasonality. With this knowledge, you can map out the ideal number of leases you'd want to expire each month to avoid any potential vacancy crises.
Say, for example, that you have a lease expiring in July. Knowing that this is typically around the time when apartments are in most demand, chances are you'll be able to rent that unit quickly if that tenant decides not to renew.
But this resident does want to renew, so you offer them these three standard lease terms—month-to-month, six months, and 12 months.
Month-to-Month
While switching to a month-to-month lease benefits the resident, apartment communities are at a natural disadvantage because they can't control when that lease expires. Often residents defer to this lease term option because they need to figure out their future plans and are not in a position to make a move yet. Considering that in this scenario, we're talking about a renewal in July, or right before the start of the slower leasing season, this puts the apartment community in even more of a predicament because the resident could move out in the middle of winter. Therefore, the resident should pay a premium for switching to a month-to-month lease. It makes sense to charge a higher rent than the rate they were paying, even though this goes against our renewal pricing philosophy. Residents who need a few more months to get their affairs in order usually understand the purpose of this increase as they're literally 'buying time.' Meanwhile, it's also okay if they don't accept these terms because your apartments are in demand now. This is fair negotiation for both parties.
6 Months
This option means the resident would move out in January, which isn't desirable for either side. Residents rarely want to move out in cold weather, while you want to avoid a vacant unit during the slowest time of year. In terms of pricing, however, it's still fair to abide by the philosophy that there should be a premium for agreeing to a shorter lease term. There's no issue with charging the existing resident $1,100/month for a 6-month lease when they had been $1,000/month.
12 Months
This is the ideal lease term offering in this scenario—at least for you. How can you make it fair for the resident? First, you could offer a lower rental rate. You can also go beyond pricing if you have many vacancies and offer an appliance upgrade or free parking garage to incentivize the resident for their loyalty further should they agree to this renewal.
Now, take all this and reimagine that it's January when a lease expires. The month-to-month option may not change, but now you offer a slightly better deal for the 6-month renewal option because that lease would expire at the perfect time in the middle of your busy season. Or instead of offering the 12-month renewal, you swap it with your 3-month renewal option because you'd rather have that unit go vacant ahead of when the busy season starts instead of next winter. You can see how your renewal strategy would be different in this scenario.
This is why you need to approach each renewal negotiation strategically to generate a fair outcome for yourself and the resident.
Conclusion
You must adopt a strategic approach to your lease renewals because the more leases you can keep, the easier it will be to navigate through seasons of high turnover and minimize vacancy. The small changes and adjustments that you make to your renewal strategy will pay off in the long run.
Our recommended action step: set a plan for the various pricing and lease terms you'd be willing to offer to each resident according to the time of year when the renewal comes up and when you'd prefer to have that lease expire in the future.
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