Pricing and Lease-ups

In my post-NMHC Annual Meeting blog post, I promised a blog on dealing with all of the new supply on the horizon (with more surely to come). So here it is.

Most of the time, operators border on panic when a lease-up is coming across the street (or even across town). “It’s newer,” “it’s nicer,” and “we’can’t possibly get the rent we’re getting now if we have to compete with that!” are all things I hear frequently. So here are some critical things to remember when you’re facing a lease-up:

1. Usually, there’s a really good reason that a developer is building a new community. THERE’S DEMAND FOR IT! So the notion that a lease-up will steal all of your prospects is simply false. There are usually more prospects for that sub-market than there are units which is why they’re building it in the first place.

2. You don’t need as many leases as the lease-up needs. Every lease-up wants to be full within a year so they don’t compete with their own non-renewals a year in. So assuming a roughly 50% turnover at a typical community, and you only need half as many leases as the lease-up does. So a) you don’t need the same market share and b) you can price to get a much small piece of the “willingness to pay” curve that your lease-up competitor can do

3. Most lease-ups spend a lot more money on marketing than stable properties. So all that extra marketing is going to attract more prospects to the sub-market. So you can ride those coattails with more drive-by/walk-in traffic than you would otherwise have. It’s why car dealerships locate themselves so close to completion. The concentration of good product increases the overall traffic. You’re getting some extra “free marketing” off the lease-up.

Now I’m not saying you don’t have to worry at all about a lease-up competitor. They are new and shiny. So you better make sure you’re make readies truly sparkle; it might be time to finally re-coat the parking lot or refresh the landscaping; and you certainly better hone your sales messaging. But it’s clearly not the end of the world—and it usually works out a whole more easily than initially feared. So relax, welcome your new neighbor with some donuts on the first morning they open their leasing office, and don’t lower your prices just because there’s a lease-up. Let the market respond, and you will often find no need to change pricing at all.