Multifamily Executive Wellness Check: Operators Look to Renewals and Quick Unit Turns as Exposure Risks Mount

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What a difference a year makes. In spring 2022, pricing power for leases and lease renewals remained squarely in the hands of apartment owners. Coming off the greatest rent growth year ever seen in multifamily (just under 15% nationally, according to a Yardi Matrix Multifamily Report), leasing managers pushed hard on renewal increases as they sought to bring inventory up to asking rent levels, freeing residents to shop the market or move out.

By the end of June, lease trade-outs had soared to an all time high of 18.8%, according to a 2022 Newmark Multifamily Capital Markets Report, and continued rent growth–albeit not as stratospheric as in 2021–promised additional runway for lifting asking rents on renewals, particularly with inflation-stricken and economy-wary residents further weakened at the bargaining table.

But rents slowed in the fourth quarter, eking their way to neutral in October and falling in November and December for the first time since 2020. Renewal rents by that time had increased by 11.8% year over year, according to the Yardi Matrix report, which remarked that growth was finally “likely at or near its apex” given the descent of asking rents into negative territory. In reality, the delta between renewal rates and renewal rent growth had reversed back in April, and, even as renewals slowed and vacancies climbed across 2022, properties continued to push for rent increases on renewing residents.

Anecdotally, turns on apartment units in 2022 were already being stressed by cost inflation to basic building materials (think carpet, paint, drywall, flooring), an evanescent working force of maintenance and repair professionals, and a global supply chain crisis that significantly impacted lead times for replacing major appliances. While demand and pricing remained strong, protracted turn times were merely inconvenient. With demand and pricing turning negative at the outset of 2023, turns are now exposing apartment portfolios to significant market risk.

“Historically, we look at month-to-month absorptions to gauge our renewal anticipation based on unit count and seasonality, with an occupancy goal between 94% and 96%,” says Louie Colella, vice president of leasing and operations for Chicago-based CRG. “Consistently, from market to market, in order to achieve our goals we have to work harder and think more strategically about how we get there and how we stay there. We need to [calculate exposure] more than the typical 30 to 60 to 90 days in advance, so we’re having those conversations with both residents and leasing managers earlier and earlier.”

With revenue management technologies–which optimize both asking and renewal rents relative to seasonality and exposure, among other inputs–facing broader scrutiny for a possible role in price inflation, many multifamily operators are defaulting to traditional comp shopping and resident communication as a way to anticipate and manage renewal turns and rate setting.

“We are taking a cautious and more guarded approach to revenue management as we increase our focus on retention,” says Pete Petron, managing director of asset management for Harbor Group International. “We want to work on renewals early and mitigate move-out exposure because we have noticed with supply chain and labor disruptions and waiting on flooring or an appliance delivery it can just take longer to turn a unit.”

Clifton, New Jersey-based Blue Onyx Cos. has leveraged its value-add renovation model to speed unit turn renovations across its metro New York and New Jersey portfolio. During the life of the lease, property management teams are making regular wellness checks on units for visibility into possible damage and needed repairs. “The philosophy is to be both respectful and helpful to the resident as we look not for higher rents but lower turnovers,” says CEO Levi Kelman. “Since a lot of our acquisitions needed gut renovations, we have our own general licensed construction team, so the ability to maintain roving maintenance and turnover crews has helped to keep our costs down.”

To combat supply chain woes, turn-minded operators also are warehousing an inventory of common building materials and appliances to reduce dependence on external suppliers. “Fourteen days is the max we want a unit on the market, which of course depends on the condition of the unit,” says Colella. “We’re trying to build a better inventory of appliances, paint, and doors, which isn’t something every property can do. But definitely once we receive notice, we do a unit inspection to understand the length of exposure to market, with the idea that five to 10 days is an ideal turn for us.”

Researchers at the National Apartment Association (NAA) are no longer tracking average duration of unit turns for individually metered and master-metered properties as part of the trade group’s annual cost of business survey that has evolved into a new income/expense experience (I/E IQ) report.

“Based on what we’re hearing from members, though, supply chain issues, which would extend the time for turns, have mostly resolved themselves,” says NAA director of public affairs Nicole Ryan. “That’s not to say it’s not happening in some pockets, but the belief is that it’s mostly in the rearview mirror.”

But even as supply chain pressure relents, the supply of new apartments coming online in 2023 and 2024 will continue to glut markets, further impacting occupancy levels and pricing power on renewals. While the Newmark report expects demand to reach 493,000 units in 2023, it won’t be enough to absorb the 576,000 new units set to be added to the current national apartment stock. Demand in 2024 at a forecasted 477,000 units also won’t be able to satisfy the new supply of approximately 510,000 more units added.

The Yardi Matrix report is already tracking the dilutive effect of new supply to an apartment sector on the downswing of historical market gains. Of the top 30 Matrix metros, the nine with deliveries of at least 2.5% of stock in 2022 saw occupancy rates drop by an average of 100 basis points.

“Sure the supply chain is beginning to normalize, but we’re still shell shocked, and we’ll still look to hoard the extra appliances and materials for a rainy day,” says Kelman. “But in regard to demand, it’s clear that absorption is going to take longer. We’ve seen it all before in oversupplied markets where you don’t have strong pricing. But that helps the resident who has been hit with rent increases during an affordability crisis. We’re hopeful that it all levels out, because we need more housing in this country.”

Source: Multifamily Executive