Inverted Leases at Renewal Time: A Big Challenge
by Donald Davidoff | Sep 17, 2013 12:00:00 AM
Its that time of the year when prices typically start going down. The good news is that with rent growth relatively strong over the past year, in general new rents are above expiring rents come renewal time. However, there are still times when rents are inverted.
With transparency of pricing on web sites, this can cause a real challenge. Existing residents see you offer no (or a small) increase and then take a look at the website where they see new pricing below what theyre currently paying. So what do you do?
Ive seen some operators actually want to hold the line on new pricing so that existing residents dont see lower prices. The challenge, of course, is that if new pricing is too high then exposure and vacancy will grow thus exacerbating the situation.
Of course you can give discounts (can we please stop calling them concessions?) outside of your pricing system. If youre really desperate, this can keep the illusion of pricing on your websites and ILSs higher than they really are to support better renewal pricing. And if youre getting traffic and able to have 1 on 1 discussions of the discounts, you might be able to get away with this strategy. But if the pricing on your website and ILS are too high, you might see a significant drop in traffic as prospects never call you when they see that pricing.
Theres no good answer. If new pricing was above expiring, then there are lots of good answers. But it shouldnt surprise us that new pricing being below expiring pricing will cause griefits a bad situation to be in, so we just have to make the best of it.
In general, when in this situation, I recommend that you offer a no increase renewal as some portion (often more than 50%) of the residents will renew at that price. Then you can negotiate with anyone who does research and comes to you complaining that a no increase offer is still higher than the market indicates is reasonable. Under no circumstance should you ever negotiate below the new marketits true youll avoid turn costs, but remember that the resident has costs of moving as well.
Its tough in these situations, so whatever you do will be a balancing act to choose the lesser of evils. Good luck, and Ill leave you with a pricers prayer: May you ride through low season smoothly and may you not encounter any inverted leases coming up for renewal the rest of the year!