It’s a troubling economy, a tough job market, and a difficult time to rent and be renting. Current residents want to be rewarded for sticking around the same place, while new customers sniff out deals and amenities like well-trained predators. The result? Bad habits, bad rates, and bad news for companies such as Memphis-based Fogelman Management Group. “It is incredibly, incredibly competitive,” says Mark Fogelman, the firm’s president and chief operating officer. The company oversees more than 18,000 units throughout the Southeast and Midwest. Fogelman says the dynamic has shifted in favor of new residents in terms of rental rates, an issue that has ripple effects with current residents. “One disadvantage of the falling economy is that, in many cases, our newer residents pay lower rents than our current residents, which is a bad habit,” he says.
But in this economy, all bets are off. Fogelman says that his company is changing how it does business in light of the current situation. On average, up to 60 percent of Fogelman’s current residents renew, with an annual turnover rate of 55 percent. “People break their leases early [in this economy],” Fogelman says. Currently, he estimates the firm is at 92 percent occupancy levels portfolio-wide, versus 93 percent at the start of 2008, a considerable drop given the decline in rental rates in that same period. “Revenue, not occupancy, is the key metric here,” he says.
So how is Fogelman managing unhealthy trends at the consumer level and still keeping business up and running? Like many property managers, Fogelman has created lease forgiveness clauses and rate management programs to boost consumer confidence in being able to sign a long-term lease. The strategy has its benefits and pitfalls, but in the longer term, the multifamily industry is acutely aware of the need for such marketing measures to ensure current residents stay put and new residents are willing to sign on.
An Easy Out
For Fogelman, combating declining metrics involved a two-pronged approach. In March, the firm deployed its Employment Interruption Program across 23 cities. If residents are laid off, a clause in their lease allows them to walk away. “We allow them to break their lease without having their credit risk upset,” he says.
Once residents show documentation proving the job loss and provide 30 days’ notice, they may leave, paying a reduced termination fee equal to one month’s rent, with no negative impact on their credit. These terms are included in new leases, while current residents may join for a $250 fee at renewal. “It’s definitely taken a lot of handling—and a lot of extra focus on service—to make sure that our current residents see the value in their lease and the value of living in one of our apartment communities,” he says. Other property managers are offering similar programs. In April, Riverstone Residential, a CAS Partners Co., unveiled its “Pink Slip Protection” initiative. Essentially insurance against job loss, the service costs less than $10 per month and allows jobless residents to remain in their apartment homes, covering a significant portion of a resident’s rent for up to two months.
Meanwhile, Tracy Levesque, senior vice president of GrayCo Properties in Richmond, Va., says she hopes her firm’s “Peace of Mind” program will attract more renters, and more importantly, keep current residents in their units. Levesque says the Peace of Mind program is offered to all new residents, while current residents can join for a $350 fee. Residents are allowed to break their lease if they find themselves unemployed or are transferred outside a 150-mile radius for work. Upon providing proof of unemployment (including two recent pay stubs) and submitting a 45-day notice of termination, residents may be let out of their lease without harm to their credit.
The Peace of Mind program comes in light of behavioral trends that Levesque has noticed with her residents—such as Gen Y renters moving back home with their parents to save money, or switching from a one-bedroom to a two-bedroom unit and finding a roommate. Growing vacancies are a problem, as well. “In 2008, our company averaged about 94 percent [occupancy],” Levesque says. “Right now, we are at 89 percent as a company.”
The reason for the drop? Job losses, Levesque says. And, as a result, she is seeing the emergence of “concession seekers.” They’re everywhere these days, nosing around for the best deals, subverting traditional marketing practices, and circling around rental properties like sharks looking for a tasty meal.
What these shoppers want today is very different from a few years ago, when luxury finishes and amenities were the driving factors. “To them, it’s not so much about luxury, or even location; it’s about what’s the cost—what’s the bottom line going to be for them,” Levesque says. “It’s not even what your rates are; it really is ‘what are your specials?’ That’s the first question they ask.”
Lease forgiveness programs alone won’t entice these concession seekers, however. As a result, property managers are looking at how to manage prices and giveaways, while still offering top-notch on-site services in a competitive marketplace.
At Fogelman, current residents face “captive increases” in rent, which are smaller than the company would like them to be. Customer service, surveys, social events, and “forming a relationship that goes beyond a financial transaction” are other methods Fogelman says the company is using to offset a gloomy outlook.
Levesque, too, is underlining the value of her firm’s product for current residents through staff friendliness and apartment quality. The renewal rate is crucial, she says, adding that the firm has employed incentives such as same-rate renewals and offering gift cards to keep current residents from moving out.
In terms of the business model, rates are the best method of control for some companies. At Atlanta-based Post Properties, the occupancy rate is at 94 percent, unchanged from the same time last year due to lower rents, says Thomas L. Wilkes, president of Post Apartment Management. It’s a challenge to keep steady rates and still remain competitive. And even though Post does not have a full-fledged lease forgiveness program, Wilkes says that, on a selective basis, the firm will put special provisions in the lease that lower the penalty of breaking a lease if a resident is laid off.
Unfortunately, the pricing of rental rates is made even trickier with the accessibility of the Internet. “There’s a tremendous amount of price transparency given on the Internet; on most properties, you are able to obtain very specific pricing information,” Wilkes says.
It’s a similar story for Bob Faith, chairman and CEO of Greystar Real Estate Partners in Charleston, S.C. Internet marketing—in particular Craigslist.com—is the main focus of Greystar’s advertising strategy. “Your existing residents have very good information [about] what the going rate is,” Faith says. Despite the recession, however, Faith says Greystar is doing relatively well, though it won’t disclose occupancy levels for its portfolio.
Ultimately, incentives such as lease forgiveness programs are Band-Aid-like solutions to larger issues within the industry—they’ll only hold for so long. For Fogelman, it boils down to one concern: “For our entire industry, the challenge is the current customers.”
Hamsa Ramesha is a graduate journalism student living in Evanston, Ill.
New and existing residents have the advantage—and they know it. Here’s how you can prepare yourself and your staff to work with them.
It may BE a terrible housing market, but residents looking for a place to rent are savvy to the fact that your company needs their business. They are scouring for incentives such as lease forgiveness programs that lessen the penalty, or let them off the hook entirely if they lose their job.
What’s more, current residents facing renewal are often up-to-date and well-informed on competitive pricing available out there. What does this mean for your on-site property managers and leasing agents? They must adhere to a few key rules.
1. Communicate. Residents love to be heard and acknowledged. Who wouldn’t? Reach out to them through customer satisfaction surveys, showing them that you are still focused on quality care. Proving that you understand what they might be going through does a lot to instill loyalty and confidence in your brand.
2. Offer incentives. Big or small, few people will turn away extra cash or a gift certificate, particularly in these economic times. Reward your residents for staying put, participating in a survey, or for just being a rock star member of your community.
3. Stay transparent. Whether it’s leases, rates, renewals, or other issues, having an open policy does wonders for frustrated residents. And who knows? Even the most miserly of potential customers may come knocking on your door. Letting residents know you’re not sitting pretty, either, may be just the ticket to tipping the balance in your favor. “We are really trying to work not only with our future residents but with our current residents,” says Tracy Levesque, senior vice president of GrayCo Properties. “We want to concentrate on those who are currently living with us, and try to adapt not only our culture but our practices to allow the residents to stay with us.”