The Demand Solutions Blog

Inverted Leases at Renewal Time: A Big Challenge

Posted by Donald Davidoff on September 17, 2013

It’s 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 they’re currently paying. So what do you do?

I’ve seen some operators actually want to hold the line on new pricing so that existing residents don’t 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 you’re 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 you’re 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.

There’s no “good answer.” If new pricing was above expiring, then there are lots of good answers. But it shouldn’t surprise us that new pricing being below expiring pricing will cause grief—it’s 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 market—it’s true you’ll avoid turn costs, but remember that the resident has costs of moving as well.

It’s tough in these situations, so whatever you do will be a balancing act to “choose the lesser of evils.” Good luck, and I’ll leave you with a pricer’s 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!”

Topics: Revenue Management