As earnings season gets into full swing, resident-heavy apartment REITs are likely going to announce significant price increases to renewing residents in order to keep pace with an expected surge in 2011 asking rents. Effective rent growth over the second half of 2010 and into the beginning of this year points to widespread concession burn-off, and apartment operators that guarded against the recession by filling up their communities are likely to have less pricing power and more dilutive effective rent gains.
“The REITs have a problem in that they are so well-occupied that they might struggle to generate strong rental revenue [relative to the market],” says Ron Johnsey, president of Dallas-based Axiometrics, which is forecasting annual effective rent growth from 4.4 percent to 5 percent this year with a vacancy drop from 6.5 percent to 5.8 percent. “One reason the market has been doing well is that the turnover rates have been much lower. But even if the market allows you to raise rents $100, it is only going to apply to new units created by move out, and we all know that as you start pushing renewal rates up, renters are going to look around for better deals, and the turnover rate will go back up.”
The scenario seems to be fine with many in the REIT sector who feel portfolio occupancy levels should be able to take a turnover hit just fine in the name of hiking renewal rents. “We know that as we push renewal rents aggressively, we create vacancy,” says Keith Oden, president of Houston-based Camden Property Trust. “We know that if we have rental growth of 7 percent to 9 percent, we are going to outstrip the ability of some residents to absorb those rental increases.”
Camden, which typically sees a monthly turnover rate of 8 percent, is anticipating that pushing rents over renewals could likewise raise its turnover, but nonetheless is advocating candid conversations with residents as it reaches for market and market-premium rents across its portfolio. “So you’ll have normal turn, then you’ll have the turn that is associated with the changing economics,” Oden says. “We want to be in a position to backfill all of that: be out there, drive traffic, capture your percentage, make a case for charging market -learing rent, and provide the best customer service of anyone in your submarket.”
Palo, Alto, Calif.-based Essex Property Trust likewise 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 re-gear the company to be willing to accept more vacancy, although not a lot more vacancy. If you push vacancy 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.”
On the high side of that trade-off are companies that are still managing new lease and renewal metrics to occupancy numbers above 97 percent. “I don’t know that if you are at the top of market your goal is to get 97 or 98 percent occupancy,” says Greg Willett, vice president research and analysis at Carrollton, Texas-based RealPage’s M/PF Research division. “Operators manage to the revenue numbers now; they don’t manage to the occupancy numbers the way they might have a generation ago. While the past year was really about rebuilding the occupancy rate after it had gotten so low, we’re really at the point where we are ready to raise rents significantly now.”