If you’ve noticed your residents sticking around a little longer than usual, you’re probably not alone. A new report from MPF Research says that apartment resident retention rates hit a 10-year high in February. That continues a five-year trend.
Lease conversion rates also hit a high, 54.5%, in February. MPF says renewal rates have been climbing since the apartment market recovery started in early 2010. Year-over-year, renewal conversions jumped 80 basis points (bps) as of February 2015, which extended a stretch of 22 straight months of year-over-year growth. February tends to be the peak month for renewal conversions, perhaps due in part to weather-related influences.
But even before February, REITs noticed that more of their residents were staying. On his fourth quarter earnings call, Equity Residential's CEO David Neithercut said the company’s resident turnover decreased 50 bps. When residents did move, they stayed on site. The company saw a 23% increase in same-property transfers. For the full year, EQR’s resident turnover declined 160 bps, from 48.9% to 47.3%.
“With the scale and variety of living options we offer across all of our core markets, it's clear that we are developing a strong following with our existing residents and delivering on our internal brand commitment,” Neithercut said on his earnings call.
AIMCO said turnover for the fourth quarter was 46.8%, which was a 20-bp improvement year-over-year. When residents did move, 21% were for career moves, 19% did not renew due to price. and 16% moved out to purchase homes.
“We achieved renewal rate increases averaging 5.2% for the year with continued low turnover, where those leases expired and were renewed,” said Keith Kimmel, AIMCO's executive vice president of property operations.
Home Properties saw what it says was a sector-low 39.9% turnover rate in the fourth quarter. And in Southeastern markets that could be prone to high move-outs to home ownership, MAA CEO Eric Bolton saw similar trends. “Resident turnover remains low with the number of move-outs during the quarter, as compared to prior year, down slightly,” Bolton said on his earnings call.
In many ways these strong retention rates are counterintuitive. On the surface, you would think rising rents or new supply would cause renters to look around. But that doesn’t seem to be happening.
“Even as new supply is hitting 25- or 30-year highs, and even as those units are leasing up well, existing apartments are not being impacted,” says Jay Parsons, director of analytics and forecasts at MPF Research. “That’s additionally impressive because rent growth has been substantial in recent years. So, in other words, neither new supply or rising rents has been enough to reverse a five-year trend of escalating renewal conversion rates.”
Parsons can only find one explanation. “That really speaks to the depth of demand in this cycle, and obviously that has positive implications for buyers and lenders considering deals on stabilized apartments,” he says.
But into the future, he expects this stronger renewal environment to flatten out. “Our best guess is that they’ll soon level off and then gradually slide,” Parsons said in an MPF report about retention. “Improving economies tend to eventually trigger increased mobility—more moving up, more moving closer to new jobs, more marriages, more babies. Any changes in lifestyle or life stage could lead to new housing choices … and therefore, increased turnover.”
But there are some obvious advantages to turnover.
“Some apartment operators are more willing to push rents higher on a new lease with a new renter than they are for a renewing lease with an existing renter,” Parsons said in the report. “In that case, moderately lower renewal conversion rates could actually shepherd in bigger overall rent growth. Of course, the key word there is ‘moderately.’ A significant drop-off in renewal conversions—triggered by decreased demand or by oversupply—could force operators to panic and slash new lease rents to backfill vacant units.”