Rent Maximization & Vacancy

I have always heard that ideal occupancy levels are 95-98% because if you are 100% occupied, then your rents must be too low. I've just been thinking about this idea this morning as I'm pricing out my renewals for the rest of the year, and I actually find the opposite might be true.

I feel like people who are looking for a new apartment are looking for the best deal that meets their requirements. They will compare several buildings in the market in order to get that best price. However, I feel like current residents would be willing to pay slightly higher than market rates just to not have to deal with the hassle of moving. I definitely feel like I can push rents a little higher for my renewals than what I can get advertising for a new move in.

Thoughts?

Your thinking is accurate. Just look at what the cable companies or cell phone companies do. That said, I think you can get higher rates for new leases as well. I actually take the position that new lease pricing should usually be higher than renewals. If you play your cards right new people moving in can still feel like they are getting a deal. If you are practicing a revenue management model most would tell you that 94-95% occupied is ideal. Best of luck.

(Sorry for going off-topic)

Mark, you bring up a really interesting point. Now, this is my own personal view, but for some reason I've never equated the introductory offer for cell phone/cable the same as a rent special for a new apartment. Or maybe, even though it is the same exact concept, I don't perceive it to be the same because of the difference in scale. The differences in price mean that I may not bother getting upset that a new customer gets a better deal for cable, but when you consider larger expense item of renting, that feeling becomes magnified.

Or it could be that your cell phone bill automatically increases and then just automatically continues forever, while our leases have to be renewed, making our residents reevaluate their buying decision every year. In other words, the change in pricing is much more fluid and easy relative to our system.

I think there is a lot of opportunity to analyze different recurring expense systems like cell phones and cable and find out whether there are opportunities for us to improve our processes.

Perception is reality. There is always a better way Brent. I agree.

I believe maintaining 100% occupancy is best. When you are 100% occupied you can spend more time, money, and effort on resident retention. Having to spend less on marketing frees up funds for more resident activities, you aren't always hunting for the next prospect so you can spend more time on your current residents forming relationships, and maintenance can spend more time on maintaining apartments instead of turning them. Residents who have a realationship with the staff and who enjoy the community are more likely to take a rent increase with minimal complaint.

Being at 100% is a very good sign that your rents are below market for your given combination of amenities, location and condirion. Unfortunately this quick measure cannot tell you how much lower than market it is. The only way to know how much they are below market is to either test higher rents until people stop renting or conduct a thorough market survey of your competition. Apartment hunters are far more sophisticated as a whole than they used to be. The Internet allows them to pinpoint the exact combination of location, amenities and price before ever showing up at the door. The market survey will tell you with a great deal of accuracy where your rents should be and is the best way to maximize revenue over the long run.

While I agree that 100% occupied is a nice place to sit (I am right now), I am also the first person to say that it means it's time to push rents. I agree with Mark's point that new leasing prices should reflect higher than renewal rates. Nothing says "I love you" to a current resident more than your own advertising for new prospects showing lower lease rates than what that resident is going to pay you for the same house they've been living in for years...
I look at the process two ways: 96% creates a better sense of urgency is a customer's mind. We're almost full... 3 apartments left... we must be doing something right, so jump on board while there's still room.
The other issue that presents itself when you are almost full is that there's still room for improvement. Don't follow the market, DICTATE it. When I update market surveys (which is typically every 2 weeks), I don't see what wiggle room I have to negotiate better customer-centric (i.e. deal breaker) market rents or concessions... I see the wiggle room I have to influence my comps. How far can I push... How much can I get... Lead the pack, don't look for what to follow.

For me personally, 100% breeds complacency...

If you focus on selling your product verses selling a special you will always be on top. That goes for new prospects and renewals. You should always drop little “renewal seeds” in your tenants ears. However, at the six month mark you should begin implementing your renewal plan and at the 90 day mark you should be heavily pushing for the renewal. I always push my renewals up at least $15 per month on a min 12 month lease and a bit higher on shorter lease terms. If you have connected with your tenants they will not mind paying the extra rent in order to maintain that relationship. Additionally, you will find that in most situations it is more cost effective for you and your tenants if you retain them. It is always my suggestion to our clients to always be working on their resident retention. Even during lease up times, you must focus on resident retention in order to get the greatest return on your investment.

Chiccorra Connor
www.occupancyheroes.com

Maintaining 100% is definitely not the way to go in successful property management. Tenants forget that its a business. Also, materials, contracts, etc. are increased for us as the market increases, yearly. We have to renew as well. While keeping Residents is a goal most of the times but sometimes the best business decision is let the Resident move out and in turn a new Resident comes in paying a much higher rent for another guaranteed 12 months.