The minute a renter turns back the keys, the clock starts ticking.
And for every minute that unit sits vacant, an apartment owner is leaving money on the table. If you consider that revenue loss on a portfolio-wide basis, those empty units can add up to thousands and even millions of dollars every day.
“Each vacant unit could cost an owner anywhere from $1,500 to over $5,000 per month when you factor in make-ready costs, advertising, and incentives to get the unit leased,” says John Rials, managing director of real estate for Charleston, S.C.–based Greystar. “We feel strongly that the process can be improved.”
There is no getting around the fact that turnover rates hover around the 50 percent mark nationwide—it’s just the nature of the beast. And while minimizing turnover time lines has always been a best practice, it has also often been an exercise in futility. Few if any multifamily firms have figured out how to expedite the process in a comprehensive, systematic way.
For many owners, it’s the next great riddle to solve. But the good news is, through a combination of technology, innovation, and elbow grease, owners are getting closer to cracking the code.
For Highlands Ranch, Colo.–based UDR, finding new efficiencies in the turnover process is a priority for 2013.
The company’s “make-ready” count—the average time it takes to move one tenant out and get the next one in—currently sits at around 14 days. And for a portfolio of about 55,000 units, each day the company’s inventory sits vacant is worth roughly $1.5 million. So, the REIT has a few initiatives under way with the goal of trimming at least one day off of that 14-day average.
First, having control over move-out dates can be a crucial factor in cutting maintenance costs during the time between tenants. And there is an art and a science to timing move-outs.
While the end of a month is the most convenient and obvious time to end a lease, it’s also a very bad idea on a large scale. Instead, the most effective strategy requires a staggered approach, says Jerry Davis, UDR’s senior vice president of operations.
“If you had 20 apartments all move out at the end of the month and a four-man maintenance team, they’re probably not even going to be touching that 20th unit until after 30 days have passed,” says Davis. “And that is really going to drive your cost up.”
The company has made this tiered approach a mandate across the portfolio, ensuring that end-of-month move-outs are no longer standard operating procedure.
When it comes to shaving off “days vacant,” big things come in small packages—seemingly small savings at the unit level can add up to tremendous savings at the portfolio level. For instance, if you can have tenants move out on a Sunday—the day before the workweek starts—rather than a Friday, such a seemingly small decision can end up saving your company big bucks.
Bringing third-party functions in-house is another way to cut costs. UDR has begun assembling in-house, regional painting teams—painters who work only on the company’s properties—to get vacant units turned quickly.
Another maintenance initiative the company recently began costs almost nothing and is all about appealing to a maintenance worker’s pride. And it’s a pretty novel approach.
UDR developed maintenance standards last year—measuring the time it takes to do a specific repair. Then, the company names names and distributes a ranking of all of its maintenance crews, showing how they measure up to the standard.
The fastest crew gets top honors, but the slowest gets shamed. You don’t have to offer incentives, the company says, because the list itself is incentive enough: It’s human nature to want to be first, and disdain being last, on any list.
Hitting a Moving Target
The third facet to UDR’s “make-ready” strategy is a concentration on its sales force. The company is hoping to get ahead of the curve and lease units the moment it knows a vacancy will occur—instead of waiting until the unit is “made-ready” to find a tenant. UDR supplies its sales staff with dashboards that rank all of its leads, from highest propensity on down.
Leasing consultants at Irvine, Calif.–based Western National Group are also notorious for micromanaging units, working out lease expirations aggressively. With a comprehensive plan in place to analyze units by week and floor plan, and the help of revenue management software, they’re able to start the renewal process well in advance and prepare for a move-out if necessary.
This focus on renting “expiring” units, rather than units already vacant, accrues handsomely to the bottom line, says Jerry Lemmon, senior vice president at Boston-based WinnDevelopment. Lemmon suggests operators look at the year as it unfolds, rather than the month a vacancy appears, to get a real-time indication of the way units will move.
This future-casting leads to a constant revision and evaluation of marketing to reach occupancy goals.
“[We learn] how to adjust our strategies as the need occurs,” Lemmon says. “Whether it be from additional pressure, timing in the market cycle, or potentially what we’re left with in overall product basis.”
But given all the money lost in turning over a unit—in both days vacant and the actual cost of maintenance—revenue management becomes particularly important.
“That cost of replacing a carpet can be a huge variable, but the total cost to turn vacancy lost plus cost can be pushing $2,000,” Davis says. “So if you’re going to incur that, you want to make sure you’re getting enough of a rent increase that makes up for it.”
Building a Better Mousetrap
The multifamily industry may be embracing revenue management software, but when it comes to organizing leads and lease expirations, the third-party products available are often found to be wanting. So, some of the industry’s largest owners are taking the bull by the horns and developing their own software.
When Phoenix-based Alliance Residential tested out its proprietary Resident Works program, a portal that allows minimal delay in viewing and renting an apartment, renters were appreciative. Alliance has since bolstered the technology, and the year-old program has been so successful that it will be extended to the rest of Alliance’s communities this year.
The program allows potential tenants to view floor plans, submit applications, choose units, transfer money, and sign leases online so that they’ll only need to pick up their keys on move-in day. And it also captures where prospects are coming from—whether via e-mails through Craigslist or an Internet listing service, for instance—which informs marketing strategy.
After sampling a handful of third-party software products to help manage leads, Houston-based real estate trust Camden found the products to be just “OK,” like many other REITs, signaling a gap in the industry.
“Something was lacking,” says Kristy Simonette, senior vice president of strategic services at Camden. “The problem is they’re really expensive, and it’s hard to justify an additional expense when we’ve been doing a pretty good job doing it in-house.”
Like Camden, Western National’s in-house team developed its own application to handle renewals, generate renewal letters, and micromanage lease expirations.
“We found that at this point, most of the software that’s out there doesn’t have the variables that we want to be able to address and develop around,” says Nick Alicastro, vice president of business development at Western National Property Management, a division of Western National Group.
Though it’s also beta-testing third-party software, Western National has found that the options are incomplete: Off-the-shelf software only has bits and pieces of what the company is looking for.
Despite all the bits and bytes, it’s the human factor that matters the most. Revenue management and other types of software meant to optimize the leasing effort are meaningless without the right people monitoring the results and putting them into action.
“If you get the right software, that’s great, and if you get the right training for your people, that’s wonderful too,” says WinnDevelopment’s Lemmon. “But you really have to have that third leg of that stool, which is a dedicated regional team able to [provide] support, meet objectives, and constantly monitor the results to identify where you may need additional focus.”
Nipping It in the Bud
Of course, the best solution to the turnover problem is to never let it get to that point: Encouraging renewals is always preferable to turning units over.
“We try to minimize turnover first,” says Robert Hicks, senior vice president of operations at Alliance Residential. “The culture here is it starts on day one. From the minute they move in, that’s when the renewal period starts.”
For Hicks, it’s simply about creating an exceptional product and atmosphere that will make renters want to stay when they receive their 60- to 120-day renewal notice.
“We know they have options; to move to another community or to buy a home,” Hicks says. “We want to create a resortlike atmosphere so they don’t want to leave.”
That begins as soon as a prospective renter walks through the door, by having a first-rate leasing center. At WinnDevelopment, for example, robust technology and a well-trained staff keep the leasing wheel spinning—an experience that, if positive, can go a long way in keeping the tenant for another year.
“You convince people that the alternative, whatever the differential might be to move, just isn’t worth it,” says Lemmon.
It’s one of the three primary components necessary in keeping a renter—a high-quality product that sets itself apart from the market; a hands-on qualified team that can sell said product and provide great customer service; and a cutting-edge marketing plan to promote it. “It’s product, people, and converting it into the market,” Hicks says.
It’s equally important to build a sense of community within the residences. And Alliance has embraced social media for that simple cause.
By using Facebook and Twitter, the firm has created a real-time community bulletin board to help keep constant communication open between the community and its residents. The free marketing has also been able to promote a cluster of on-site social events, where prospects can experience what it’s like to live in the community.
And if a tenant should leave due to circumstances beyond your control—such as a job change in this economic climate, for instance—providing him or her with leads to your communities in other markets is the best approach to keeping occupancy high throughout your portfolio.
“When someone wants to move, we want to know why,” Hicks says. “That’s the No. 1 question.”
But when they do leave, hitting a move-out date with a new renter is the name of the game in shaving turnover time lines.
“Ideally, the vacant unit doesn’t become vacant; it’s already leased so you minimize days lost,” says Alicastro. “Managing them daily matters.”