As any apartment vet knows, rents are quite robust these days. Dallas-based market researcher Axiometrics, in fact, reports that rents have performed sensationally since November 2011. In that time frame, national annual effective- rent growth has remained in a relatively consistent band between 3.96 percent and 4.10 percent. But in the second half of this year, Axiometrics says, things could get even better, with national annual effective-rent growth pushing above 5 percent, to 5.35 percent.
For apartment buyers, this rapid rent growth isn't necessarily a good thing. In a rising-rent environment, cap rates have continued to fall, declining 33 basis points nationally from the second quarter of 2011 to the second quarter of 2012, according to New York–based research firm Real Capital Analytics. Buyers are often forced to purchase on projected rents just to compete. And if they win the bid, guess what the prize is? They have to make those rents work.
“Marrying where cap rates are with what investors want makes for an interesting mix,” says Ken Miller , COO for Atlanta-based management firm Lane Co . “We want to see if we can offer an investor a reasonable return over a certain period of time. But with where investors are now, it's a tough row to hoe.”
When Miller says “where investors are,” he means where their expectations are for rent increases. Right now, investors see the national numbers that Axiometrics and other providers are putting out and hear that companies such as Lane are seeing increases exceeding 10 percent in markets like Houston, and they expect those kinds of rent bumps in their properties, too. Smaller owners face similar pressures as they push the envelope on pricing. But to get huge returns, your renters have to pay.
Here are some ways to push rents without alienating your tenants (too much).
Sell the Value
While rent increases are music to the ears of apartment owners and investors, to the resident— the same person a leasing agent may have begged to sign a lease during the recession— they're more like the sound of a dental drill.
Miller recognizes that. “It took a lot of effort to get that new lease in the door,” he says. “We want to do everything we can to see that that resident has a great community experience.”
A letter with a large renewal doesn't fit the category of a “great community experience.” “If they came in and signed an $850 lease, are you going to mark them to market at $1,100?” Miller asks. “I don't think so.”
So Miller sets his pricing system to calculate an increase off the resident's current rent. With a typical tenant, the first thing a manager will often do is point to the Internet— assuming the firm's prices are in line with the market. “Everybody knows it's a tight rental market, and, typically, if they go to any of our competitors, they'll see similar price changes,” says Mark Fogelman , president of Memphis, Tenn.–based Fogelman Management Group , who says he's seeing the most aggressive price increases he's seen in a decade.
Managers will also rely on their service to help make the argument to renew at a higher rent. “We believe we provide the customer service our residents expect and they'll see value in their increases,” says Gail Ruggles , vice president of operations at Atlanta-based Gables Residential, who says her company's rates are in line with the market. “When you live up to what you're selling in the very beginning, people are open to rental increases.”
Fight the For-Sale Competitor
When a resident gets a $100 or $150 rent increase, other housing options become viable. “There are definitely a lot more people saying, ”˜I might be able to move into a house,' but they're concerned about two things—job stability and mobility,” says Andrew R. Livingstone , an executive director for Charleston, S.C.–based manager Greystar.
Livingstone's team works on emphasizing the mobility and lack of commitment associated with rental housing. Fogelman's group does that as well, striking on the cost of moving and the advantages of rental housing. So far, he thinks it's working.
At Gables, the message about ownership is similar. “Homeownership isn't just about a mortgage payment. There are additional costs associated with being a homeowner,” Ruggles says. “We offer a hassle-free living experience. It includes all these things you don't have to worry about and all the wonderful amenities you get to take advantage of by living in a Gables community.”
Fogelman agrees. “Now, more than ever, residents see the virtues of quality rental housing without the commitment and obligation of a mortgage,” he says. “It has struck a chord with our customers right now, and they're willing to pay for flexibility and mobility.”
But that won't be the case forever. Neither will today's rent increases. So in the long run, it's probably best to project conservative increases and enjoy the run as long as one can.
“I doubt some of the pricing we're getting is sustainable forever,” Fogelman says.