Hitting the Slopes: Why Lease Expirations Matter at Year-End
by Donald Davidoff | December 03, 2019
As we head into the winter months, it’s normal to think about slopes - especially if you live in Denver, as I do. Denver is famous, amongst other things, for both skiing and multifamily leadership, and the “slopes” that we find ourselves discussing with multifamily leaders at this time of year are the profiles that describe a property’s lease expirations.
Lease expiration management (LEM) is particularly timely now as we lease December/January move-ins, soon moving on to February (which many are already sending renewal offers for) and then March. Now is the time where we get to move expirations out of undesirable expiration months into more desirable months.
Miss your targets in the next few months, and you’ll have to wait another year to try to fix that pain. It should be simple enough, right? We know there’s seasonality, so we know what good and bad months for expirations are. All we need to do is stop signing leases with bad expirations and only sign leases with good expirations. As my good friend and former colleague now at RealPage, Rich Hughes would say, “Done and done,” right?
Yet we’ve rarely (if ever?) encountered a COO or head of pricing and revenue management (PRM) who’s truly happy with their LEM profiles. Typically, the best we hear is something along the lines of “Well, we’ve gotten the curve to be better than last year.” Here’s a few reasons why that is the case:
- Renewal offers are typically sent in monthly batches that are sent as much as 105 days in advance of lease expiration. This makes it difficult to precisely control how many renew for different expiration months.
- Great LEM is at the unit type (or at least bedroom count), not the community level. That makes it both more complex to manage (multiple LEM curves per community rather than a single curve to manage) and more susceptible to small changes (2-3 too many expirations out of 50 2 bedroom home is much more painful than the same amount across all 250 homes of a full community). It’s not unusual for a good community-level curve to mask the underlying reality that some bedroom counts are low on expirations in a particular month while other unit types are too high.
- Reality rarely matches the model. Good LEM algorithms set prices based on renewal and new lease expectations. While generally accurate over large datasets and the long run, they are almost always off at very granular levels; and granular levels are exactly where LEM is most needed.
- Even when we get the curve right, we face a constant battle to keep it right as every turn resulting from a move-out becomes a challenge to maintaining LEM. We put an expiration in July. Then the resident moves out, and we re-lease it for an August move-in. When that person moves out, it’s likely the next move-in will be September and so on. Like Sisyphus, we never get to admire the accomplishment of getting the rock up the hill for very long before it’s right back at the bottom again.
- Sometimes the curve being off a bit is okay. For example, when a resident chooses to pay the “bad expiration month” penalty put in place by a good PRM system, the curve looks off; however, we’re being compensated for that by the higher rent.
Given all these challenges, here are a few tips from 20 years of working on LEM:
- Trust your PRM software. If you don’t have PRM software, get it; if you do have PRM software and don’t trust its LEM algorithms then replace it with software that you do trust. LEM was candidly pretty poor in early version of PRM software back in the ‘00s; however today at least some of the off-the-shelf solutions now do LEM well.
- Be patient. If you inherit a bad LEM profile, don’t try to get it perfect in year 1. It often takes at least two years to get the curve in good shape. You don’t want to manhandle LEM so much that you turn away demand. While an 18-month lease might be best for you, customers may only want a 12-month term. Pay attention to what your prospective residents are asking for and make sure it aligns with your strategy, otherwise you may want to reevaluate.
- Send renewal offers out more frequently (weekly, or even daily, instead of monthly), closer to the lease’s expiration date. That gives your software more information as renewals and notices come in.
- Ensure that leasing staff is following up on renewals and entering renewals/notices in a timely matter. Pricing calls are a great forum to check in on this practice.
- Put expiration dates on renewal offers. One of our team members has direct experience with a simple disclaimer to residents, “renew now to ensure your preferred lease term is available.” If they later maxed out the month the resident wanted, they offered the next closest at the same price.
- We have found it’s much easier to move an expiration from December to June by offering an 18-month option than trying to push a 6-month renewal. Do the math on whether the benefit of moving the expiration to June is worth giving up 6 months of rent increase. Sometimes it is, and sometimes it’s not.
- Publish your LEM curves with associated optimal curves so operators and leasing associates can see what you’re trying to accomplish and why. They want to be successful so when you can show them a picture of what we’re trying to achieve, it really brings the goal to life and helps rally everyone around that.
- Don’t let perfection be the enemy of the good. Keep working the curve each year to make it better than the last. As noted earlier, LEM curves are never stable so you’ll never be “done”.
If you have angst about your LEM curves, you’re not alone. Give us a call and we’ll be happy to help you put a great action plan in place!