It's no secret that the mad rush to homeownership pulled residents away from apartments at the same time as the shaky economy and lack of new jobs has kept new renters from filling those empty spots. But it has also left apartment firms trying to raise occupancy levels facing another challenge: The people still in the apartment market don't necessarily possess the financial resources of the ones who left.
As a result, Dave Woodward, CEO and managing partner at The Laramar Group in Greenwood Village, Colo., says he's had to revisit credit cut-offs at selected properties. “If you need to capture the same number of residents to maintain occupancy and you haven't lowered your cut points, you won't be able capture that traffic,” Woodward explains. “We haven't done it across the board, but in certain instances we've lowered our scores.”
Others have tried to avoid such a strategy because of the risks it entails. “We haven't changed our qualifications,” says Jared Miller, director of marketing for Lane Properties, an apartment owner in Atlanta. “Even on a property that has a couple of months' free rent, that person has to qualify as if there's not a concession. It certainly hurt occupancy some, but we don't have a delinquency problem at our properties.”
While credit criteria also remain the same at AvalonBay Communities, Dirk Herrman, chief marketing officer for the Alexandria, Va.-based luxury apartment firm, acknowledges that rent reductions and concessions do increase the number of people and the type of tenant who typically can afford to rent an Avalon apartment. “While we have not changed our system of what it takes to qualify for an AvalonBay apartment,” Herrman explains, “what it takes to qualify for a $1,500 apartment is different than what it takes to qualify for a $1,300 apartment.”
Such observations and anecdotes lead Lane's Miller to believe that apartment communities may be evolving as their renter profile changes in response to the appeal of homeownership and the pressures of the economy. “We're seeing that the people who used to lease at the B properties are now trying to lease A properties,” Miller says. “They're moving up one asset class."
National data supports apartment executives' sense that the financial quality of tenants has gone down. There has been “a gradual decline in overall credit scores has occurred over the past 24 months,” says David Carner, a senior vice president for Carrollton, Texas-based RealPage, whose data says renter credit scores hit the bottom last fall, a decline that corresponded with plummeting interest rates. “Just as you would expect, as 30-year fixed rates dropped, credit scores dropped similarly,” says Carner, who speculates that the conversion to homeownership started with people who had higher credit scores and started to trickle down as the single-family market began to solicit prospective buyers “who previously were constrained from homeownership by insignificant income, poor credit, and the inability to raise the appropriate down payment.”
Luckily for the industry, credit trends seem to be improving. RealPage's credit score data showed a significant jump by March 2005.
Of course, there's always room for improvement. “I thought the trough came in the third or fourth quarter of 2004,” says Nevel DeHart, executive vice president for Registry-SafeRent in Rockville, Md. “You could look at national stats and see the trends where you saw some significant shifts downward and then it stabilized. As an overall statement, renter quality has gone up across the United States. But has it gone up dramatically? No.” —Les Shaver