Most companies wisely set renewal policies by month and by property. Certain times of the year may call for different strategies and you’ll want to consider property performance as part of the overall renewal strategy. However, it can be a quite subjective practice to set renewal parameters. There are a few guidelines to keep in mind when doing so:
1. Don’t be afraid of minimum increases.
There is an accepted notion that a lease renewal will include some type of rent increase. Even if residents are above current market, not trying for an increase (even if a nominal one) can leave money on the table.
2. Consider the cost of turning a unit.
While the ideal situation may be to move everyone to market, giving a slight discount to market for current residents can help you in a few ways. It recognizes if the current resident moved out, the replacement rent would not be exactly equal to market rent as you would have to incur turn costs, marketing costs and potential vacancy loss.
It also helps adjust for any forecasting error, since most renewals are computed off of a forecasted market rate that is sometimes more than 90 days out. I typically recommend adjusting your forecasted market rent 1-2% to account for this.
3. Shy away from capping increases.
If you want to be more conservative in your renewal strategy, consider adjusting your capture rate rather than simply adding an increase cap. Doing so adjusts for how far below market the resident is. A straight percentage cap can end up handing out higher increases to those closer to market. (Example: if market rent is $1200 and resident A is paying $1000 and resident B is paying $1100, a 5% cap would give resident A a lesser increase than resident B. Utilizing a capture ratio of 50% instead would give resident A a $100 increase and resident B a $50 increase, favoring the higher paying resident. Note that these values are for example only, and recommendations for both increase caps and capture rates would be higher).
Pricing strategy for renewals is a balancing act that can oftentimes be more art than science. At the end of the day, the team setting the strategy is not even the team selling it. To adjust for this, we recommend the pricing team work with the site teams in order to:
1. Give operators the power and confidence to negotiate.
It’s difficult to get renewal offers right every time, and conditions may change between when you first sent out offers and what they are today. Giving teams some flexibility can help you course correct when needed.
2. Explain the why.
Just like new pricing, it’s important for site teams to understand how these renewal offers were calculated in order to help sell them. Involve your team to get their input in the renewal process and coach them on the strategy.
Providing analytics can also help create buy in and take some of the emotion out of pricing. Consider an upcoming month of higher than average expirations - a typical community manager will be worried and want to go on the defensive. However, if it is peak season these heavy expirations may be by design. Remind teams of the higher demand in this month and pull numbers to support these trends in order to put them at ease.
A final point to remember is that when dealing with someone’s home, pricing is not the only factor in play. There are ways to help stack the deck in your favor that sometimes fall to the wayside. It is important for teams to remember that customer service doesn’t end after the lease has been signed. A property that communicates well about common area repairs or renovations, has timely service resolution, and invests in building a community with activities and events will have a much easier time with retention than one that doesn’t.