Memphis-based Fogelman Management didn’t know what they were getting into during the lease up of one of their 300-unit properties.
The property was under contract for unsolicited offers. And Fogelman was way ahead of schedule, able to lease 40 units to traveling nurses who were paying 1.5 percent higher in monthly rent.
But because the buyer and lender wouldn’t accept revenue from corporate leases, they had to tell the clients that they couldn’t renew their leases. It left them with 40 vacancies all at once.
“I think we got a little bit too greedy getting the lease-up done, and it backfired,” Mark Fogelman, president and COO at Fogelman, said at this year’s MFE conference in Las Vegas.
It’s a delicate balance, lining up rents and expirations for the proper increase so that revenue is consistently growing and flowing on the property. All panelists at the conference admitted to making mistakes that might have affected rent increases, including holding rents too long to achieve budget and failing to manage lease expirations.
But aside from legal agreements, the biggest mistake panelists agreed on was not recognizing your place in the cycle.
“If you miss the signal or if you’re late to figure it out, it can be very damaging,” said Robert Slater, COO at Greensboro, N.C.- based Bell Partners. “You’ve got to know where you’re at in the cycle; you have to have intentional strategy for where you’re at.”
A lack of proper communication can easily backfire, as well. At one property mentioned, managers insisted on raising the rent for 20 percent of tenants, expecting them to vacate to make way for new renters. The increase, however, erroneously was sent out to all of the residents, ending with nearly full vacancy throughout the property.
Setting Rents, With and Without Software
About a third of renters will likely move because of life changes, a third will stay, and the last third is who you have to grab, said Pierce Ledbetter, CEO of Memphis-based LEDIC Management
The difficulty remains, however, in how to determine the increase. With market studies no longer believable to many managers, there’s been a driving force to adopt revenue management as a frame of reference. But there’s a human component necessary to pricing.
“With the advent of revenue management, we have to shift in how we actually price,” said Bryan Pierce, director of revenue management, at Vancouver, Wa.-based Holland Residential. “We’re not looking at competition. Look less of what everyone else is doing, and more at what you’re doing.”
Regularly shopping other properties is key to locating rent prices when you’re doing a renovation, with or without the software, Ledbetter said.
Additionally, a satisfied resident will absorb the increase better, and that starts by changing their expectation at the outset, Slater said. His company isn’t convinced that all tenants need unbridled luxury–they simply want hassle free living. Sometimes, delivering on those basics will make selling the increase easier.
But renters can only be pushed so far. Eventually, residents will be forced to move down a class in property, or move into the suburbs if rent increases are too much. You also don’t want to throw out your good tenants.
Ultimately, the market will tell you how much is too much. If renewal rates are too low, then you’re pushing rents too high.
“Part of the goal is trying not to commoditize,” Pierce said. “Remember someone’s living there. So we push further on the front end and less on the renewal.”
-Linsey Isaacs is an assistant editor with Multifamily Executive magazine. Follow her on twitter @LinseyI to continue this conversation.