Brad Cribbins has had a great couple of years. As chief operating officer at the management division of Phoenix-based Alliance Residential, Cribbins has helped push rent increases at a nice clip across the firm’s 50,000 units and 24 markets since 2010.
“On average, we’re up in the high double digits since 2010,” Cribbins says. And he doesn’t plan to take his foot off the gas in 2013, either.
With markets such as San Francisco projecting rent growth of 8 percent to 10 percent this year, and Denver, Dallas, and Seattle slated for bumps of 4 percent to 5 percent—even though that growth rate has slowed from last year—his outlook continues to be optimistic.
“Supply is building, and we continue to watch deliveries, but net absorption in key markets with select demographics will remain strong,” Cribbins says. “We expect a good year.”
After the past two years of seemingly at-will price increases, 2013 is shaping up to be a year of inflection, one in which operators will undoubtedly still be able to charge more in rent than they did in 2012, but not with the same gusto seen since 2010. MPF Research, the market intelligence division of Carrollton, Texas–based multifamily technology provider RealPage, is projecting annual apartment rent growth of around 3 percent for 2013, down from a high of 4.8 percent at the top of the cycle.
Having weathered the Great Recession and the bottom of the market in late 2009, the multifamily sector started experiencing unprecedented demand, driven by the reality that many erstwhile homeowners suddenly faced in the depths of the mortgage crisis: They had nowhere else to go. With limited supply and what seemed like an almost unlimited demand, rents started rising sharply off their lows as the market turned.
Rents have increased nationally, from an average of $944 in December 2009— the market’s low point—to $1,072 in October 2012, a jump of more than 13.5 percent, according to Dallas-based multifamily research firm Axiometrics. In some markets, such as San Francisco, the rise has been even more dramatic, up a full 20.3 percent from four years ago.
The magnitude of those numbers has given pause to some in the industry who question whether 2013 will be the year to give back at least part of the recent gains multifamily has enjoyed. After all, this cycle hasn’t looked like ones in the past: Rents have continued to grow even though real job growth has been sluggish and the return on 10-year Treasuries has continued to drop. In most weak job and deflationary environments, rents should go down.
But it’s important to look at current rent growth in the context from where it came.
Axiometrics says today’s national average rent number is actually just 5.3 percent higher than it was in October 2008, when it was $1,018. That means that real average rent growth over the past four years has been right around 1.25 percent annually, which seems, well, downright modest compared with the industry’s historical average of 2 percent or more.
“A lot of companies and properties are still just trying to catch up to pre-recession levels from 2008,” says Emily Goodman, regional property manager at Newport, Calif.–based CORE Realty Holdings Management, which manages 6,500 units. Goodman is targeting rent increases in the range of 3 percent to 8 percent for 2013 for her portion of the portfolio.
That may explain why many operators contacted for this article are still cautiously optimistic about their ability to push rents going forward, even though many temper that enthusiasm by emphasizing a need to return to the core fundamentals—superior customer service, continued maintenance, upgrades to common areas and amenities, and an intimate knowledge of your submarket and comps.
“Rent increases are still best accepted by residents where there is visible evidence of continuous improvements and upgrades at the property,” says Barbara Gaffen, co-CEO of Northbrook, Ill.–based Prime Property Investors (PPI), which runs 3,500 student housing beds on six campuses nationally, and 508 conventional units in the Chicago area, and has seen 22 percent rent growth since 2010. The firm is projecting continued growth of 3 percent to 4 percent in 2013. “You’ve got to keep on top of your common areas, building exteriors, and amenities, as well as pay attention to what you’ve got in your individual units,” Gaffen remarks.
Even if you do all that this year, though, residents may still bolt. MPF’s Greg Willett emphasizes that while demand should remain strong, resident behavior will start to change from the stay-put attitude of recent years.
“We are entering this phase of the cycle where people are just going to move a lot more than they have been,” says Willett, vice president of research and analysis at the firm. “Some are going to move to the newer product that’s come [on line]; some are going to head down to something more affordable because of the rent growth we’ve seen; and the for-sale sector is coming back to life as well.”
Taken together, these data point to 2013 being more dynamic than multifamily’s recent past. Amid this more volatile climate, here are some strategies you can use to keep driving your rents—as you should—without driving residents from your rent roll.
FEAR NOT THE FOR-SALE MARKET
With the for-sale market on the mend—and historically low mortgage rates beckoning would-be homeowners to reconsider the benefits of owning—many operators this year are beginning to wonder whether residents will revert to their traditional penchant toward homeownership. For sure, the news last summer from real estate tracker Trulia.com that owning is now cheaper than renting in all of the top 100 metros in the country was indeed sobering. But while some renters will inevitably move on, we’re not in the same place we were five years ago.
“We’re not even close to the pre-recession, pre-financial–crisis levels,” says Gaffen. “Stricter lending guidelines, unlike the loose standards pre-2008, are still going to temper a lot of the flight from renting to homeownership.”
The other black mark on homeownership is the same scar that’s been left on the rest of the economy: still-sluggish job growth. Operators say many residents today simply don’t want to make the commitment of owning, since they aren’t as confident they won’t have to seek employment elsewhere.
“The reality is, the job market is still tough,” says Goodman. “Why tie yourself down to a house and mortgage when you may need to move to where the jobs are? Breaking a lease is far less costly than trying to sell your house in today’s market.”
GIVE THEM A REASON TO STAY
Of course, given the changes in the market, you’re not likely to be able to raise rents with impunity going forward. As competition increases, you’ll have to keep working to keep your residents from going elsewhere, whether to their own home or to someone else’s apartment community. That means keeping exteriors looking sharp and giving residents a reason to stay.
“Every year, we invest millions of dollars into our properties by painting exteriors, replacing roofs, sealing and striping parking lots, and adding desired amenities,” says Kevin Finkel, executive vice president at Philadelphia-based Resource Real Estate, which is projecting 5 percent rent growth across its 24,000-unit portfolio in 2013. “Our No. 1 priority is to provide our residents with well-maintained, safe homes.”
Adds Cribbins, “When executed well, our ability to connect and create community in a broad sense extends the life cycle of the average renter despite rent increases.”
Germane to running and maintaining your properties in a professional manner, of course, is keeping a close eye on your comps. A push to raise rents based on projected demographic trends without keeping fundamentals in mind isn’t what running apartments is about.
“No matter what the market is like, you still have to constantly monitor vacancy, turnover, and rent growth,” says Ken McElroy, author of The ABC’s of Real Estate Investing and principal of Scottsdale, Ariz.–based MC Cos., which runs 8,000 units. “If you push out a resident over a $10 rent increase, then you have made a bad business decision, but if it’s $100, it may be a good one, if your vacancy is low. There’s no one-size-fits-all answer.”
Other operators stress that now isn’t the time to become complacent just because things have been relatively easy the past few years.
“In a rental market as strong as the current one, replacement tenants are easy to find, but you still want to avoid turnover, if possible,” says Lee Kiser, principal of Chicago-based broker Kiser Group, which expects Chicagoland rents to flatten this year from 2012’s growth of 7.5 percent to 10 percent. “Your best strategy is still to shop your competition and understand what alternatives your tenants have. You want to make sure you stay competitive.”
BE UP FRONT
Apartment pros poised to keep increasing rents in 2013 stress that presentation, as well as product and service, are critical to raising rents in the right way. That means educating existing residents about the costs to move, and even the alternatives they have to your property, while keeping common areas and other amenities sparklingly enticing. But you don’t want to tiptoe around the issue, either.
“You don’t raise rents in a ‘sensitive’ manner,” says Cribbins. “Markets are made and value is established based on the strength of the product, the quality and execution of the service provided, and how well it’s sold in comparison to the competition. If your product is weak in one of these areas, it won’t matter how sensitively you present an increase—today’s consumers are smarter and understand they have choices.”
For Nicholas Dunlap, vice president of Fullerton, Calif.–based Dunlap Property Group, who is aiming for a 5 percent increase in rents for 2013 across his 1,000-unit portfolio, the main point to get across when selling a rent increase is simply to outline where it’s coming from.
“It amazes me to see the landlords that take the ‘throw the stone and hide the hand’ approach to rental increases,” Dunlap says. “We make it a point to share with our residents some of the rising costs we’re facing: utility increases and the new taxes and fees associated with owning and operating a multifamily property. We explain that we shoulder the burden as best we can and only pass through a little of it. We let them know where we are relative to our comps. We’ve found our residents appreciate the transparency.”
Of course, you don’t have to raise just the rent to raise revenue. Other opportunities, such as charging for electric-car ports, premium parking, and even pet fees, can help boost your NOI, without invoking sticker shock over your rents.
“In today’s market, residents will pay the $25 per month to have their pet and won’t think twice about it,” Dunlap says. He also notes that an increased deposit—of up to an additional $500—helps offset any extra wear and tear on your unit. Like many operators, he points to being pet friendly as a key differentiator, especially with renters who may have owned a home in the past. “Just allowing pets is a major selling point to advertise at your property. Residents will happily pay pet rent and an increased deposit.”
In Chicago, Kiser takes another tack on deposits entirely, offering residents the option to forgo them if they agree to a lesser, but nonrefundable, move-in fee.
“Security deposits are supposed to be refundable, but if they’re needed for unit repairs, it ultimately causes a rift between the landlord and the exiting tenant,” Kiser says. “A $250 move-in fee is instead a one-time charge, not a deposit, and can go directly to your bottom line as income. Tenants like it too, because they don’t have to tie up a whole month’s rent for the duration of the lease.”
Whatever your rental strategies for 2013, you can still push rents and fees without pushing away your residents.