NOI Drivers Combat Rent Growth Decline: New Revenue Streams
Multifamily operators are finding new revenue streams by identifying new net operating income (NOI) strategies within day-to-day operations and things such as short-term leases and flexible stay.
A historic period of rent growth ended last year, subsequently followed by several months of decline that have carried into 2023. According to the April Apartment List National Rent Report, year-over-year rent growth continues to decelerate. Those headwinds pose a significant challenge to multifamily owner/operators, and their response to eroding market factors could dictate their portfolio performance for the foreseeable future.
While the typical industry reaction is to cut costs and batten down the hatches, inflation rates continue to limit the efficacy of expense reductions. Cutting staff and services can trim budgets but also impairs resident retention efforts. Operators are finding that focusing on resident renewals and identifying new revenue streams and net operating income (NOI) strategies within day-to-day operations better positions them to weather the storm.
Budget cuts enable owner/operators to survive economic challenges, but they represent a reactionary approach. From an NOI perspective, creating new revenue streams for growth is easier and more effective than cutting costs, and enables operators to maintain full-scale operations. Here are a few proactive revenue-generating tactics owner/operators can implement to thrive in the face of rent growth challenges.
One of the most effective generators of new revenue streams in multifamily is short-term leases, which command higher premiums.
But, historically speaking, they haven’t been effectively leveraged in the industry. Savvy owners have finally recognized that any-length-of-stay management models, which offer furnished short-term homes alongside traditional 12-month leases, can be powerful revenue drivers as it de-risks the asset by attracting an array of customers. Variable-stay programs that allow the agility to customize the unit mix based on market and seasonal demand have proven capable of boosting upside revenue by as much as 40%, and averaging a 10% NOI uplift.
“Flexible stay models are effective because they cater to consumer demand, whereas communities with 100 percent traditional leases require the renter to conform to a pre-established structure with limitations on revenue,” said Lisa Yeh, chief operating officer with Sentral — a full-service, whole-community management and hospitality company that features any-length-of-stay leases. “The continually growing remote workforce means a large percentage of renters aren’t tethered to a desk in an office or a specific city. They have the freedom to roam because they aren’t required to live where they work. People want to take advantage of that newfound flexibility, they want to travel and experience new places, and they’re willing to pay more for homes that accommodate that lifestyle. Additionally, flexible leases accommodate others wanting flexibility including those in between homes and second homes.”
Communities with flex living models attract not only traditional renters, but also business travelers, vacationers and digital nomads. By eliminating dependency on a particular renter demographic, variable stay programs also mitigate operational risk by diversifying a community’s renter profile. And owners always retain the ability to default back to 100% traditional leases.
Repurposing Package Facilities
In addition to leveraging their homes, owner/operators have also found opportunities to repurpose former amenity spaces to drive revenue. Due to explosive e-commerce trends, third-party, off-site package management is rapidly replacing untenable package rooms and package locker systems. The switch makes on-site package facilities unnecessary, enabling owners to repurpose the physical space previously dedicated to those amenities.
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Reclaimed space within a multifamily community is ripe with revenue-generating potential. Former package rooms have been converted into leasable offices, podcast or recording studios, and storage facilities. Depending on the recovered square footage, communities have even turned package rooms into short-term guest rentals or an extra studio apartment home.
“If we acquire an asset that has a package system or package room, we talk about how we can repurpose that area into an income generator as part of our value-add projects,” said Dana Caudell, executive vice president of operations at Wood Residential. “There are all sorts of things you can do to repurpose a package room. You can turn it into work from home stations that you rent out, or even into an amenity like a dog spa to attract prospective renters. As a forward-thinking operator, there are so many things you can do with the former package room space to add asset value to the owner.”
Electric Vehicle Charging
Electric vehicles are now undeniably the future, and sales reached the tipping point in the United States in 2022, achieving a level where new technology reaches the point of acceptance. This means that the increases in EV model introductions aren’t going to subside, and annual sales records will continue to be broken. A YouGov poll showed that 23% of licensed U.S. drivers planned to make their next vehicle EV or PHEV with 65% stating a belief that electric vehicles are the future of the automotive industry. The federal government is making increased infrastructure investments in EV charging to help encourage growth. Multifamily investors are also beginning to realize that EV charging stations are becoming an essential part of their revenue stream structure.
“We asked our residents about EVs and other sustainability topics with a series of surveys. An overwhelming two-thirds indicated they had very high interest in making the switch to an EV,” said Thomas Stanchak, director of sustainability at Stoneweg US. “We’re confident our addition of EV chargers is helping us to attract and retain the best tenants. In a competitive rental market, amenities like EV charging can make your property stand out from the competition. EV charging is also a meaningful part of Stoneweg’s overall environmental strategy, which is to implement practical and effective solutions that support residents through this transition to a cleaner energy future.”
Not only does the early installation of reliable, well-placed EV stations provide communities with a competitive advantage for environmentally and socially conscious residents, but they can also share in the revenues generated by EV owners bringing their batteries to 100%. According to Xeal, an EV charging provider for the multifamily and commercial industries, EV charging stations enable owner/operators to provide a necessary service to residents while also achieving an ROI on each session by installing chargers at their communities.
Reduced Pet Restrictions
Breed and weight restrictions have been the norm in many multifamily communities, even among those that are pet-friendly. However, this approach could also restrict NOI across a portfolio. Numerous case studies have shown the lifting of restrictions and resulting increase in the number of pets on site leads to more connected communities and boosts retention rates, which minimizes vacancy loss and turn costs.
“Setting aside that many of the reasons for restrictions are based on long-held misconceptions and have been proven to be scientifically inaccurate, lifting them has proven to be of significant financial benefit for rental housing operators,” said Judy Bellack, Industry Principal for Michelson Found Animals. “Research shows that pet-owning residents build community through their shared love of pets and the activities surrounding them. This creates strong bonds that in turn create longer-tenured residents. And while many operators cite the potential for damages as a key concern, only about 9% of units report pet damages, averaging only $210 per unit – a number more than covered by the average security deposit.”
Upside revenue is available for owner/operators looking for a new approach and tired of negatively impacting operations through continual cuts to labor and services. Expense reductions aren’t the only way to balance the NOI ledger in times of rent growth decline. An emphasis on new revenue generation, either through subtle or wide-scale operational changes, could permanently tip the scales to the red.
Source: Rental Housing Journal