29Nov

Multifamily Pricing Archetypes: The Vacancy Allergic

Author: Rainmaker Team

terrified-man.jpgIn the New York City metro, massive apartment buildings dot the city’s breathtaking skyline. Even more breathtaking is that properties totaling 1,000 units or more are not uncommon. But with big scale comes big risk, the biggest of which is vacancy. For some firms that own and manage apartment properties in and around New York City, maintaining a high occupancy rate is always a chief concern.

One major New York metro property owner is a classic example of the Vacancy Allergic pricing philosophy, one of the five pricing archetypes identified by Rainmaker's analysis of how operators use its LRO revenue management system. In this post, we'll provide a general overview of this philosophy and provide valuable perspective from the executive leasing director for the above-mentioned company's metro New York City multifamily portfolio about why his company follows the philosophy in the Big Apple.

The Pricing Archetype in Action

Generally speaking, Rainmaker found that there are two kinds of operators who fit the Vacancy Allergic persona. One part of the group consists of those who are looking for a consistent revenue stream for ownership and investors. The returns don't necessarily need to be huge but these operators want to have a firm handle on what's coming in every month; they aren't comfortable with high volatility. Properties that fall into this group can really be any size and in any market; this is simply a strategic decision that its owners and operators pursue.

The other type is the operator with very large assets, typically in major urban areas. At these big communities, any measurable vacancy quickly converts into a fairly significant dollar amount. Say, for instance, a 1,000-unit property has a 2 percent vacancy rate. That translates to 20 units, meaning a lot of revenue is left on the table — in fact, so much that it’s the same revenue loss that an 8 percent vacancy rate would produce at a more typically sized 250-unit community.

The size of its communities in the New York City market is definitely one reason that this manager follows the Vacancy Allergic philosophy in the region, where its portfolio totals more than15,000 units.

Speaking specifically of a cluster of more than 10 buildings totaling more than 4,000 units within extremely close proximity of each other, which the above-mentioned company considers a single property group, the company's executive leasing director said, "The size and breadth of the community and the amount of natural turnover that we have almost demands that we defend against vacancy."

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Another factor is the extremely high cost of rent in the market and therefore the significant sums of money that they don’t collect when an apartment is sitting empty. "For us, being in the New York metro market, a month of vacancy is expensive," the executive leasing director said. "I know that in most instances I'm going to have about 20 to 30 days of total vacancy on an apartment when it vacates, so right there I'm looking at upwards of 8 percent loss to just revenue from the vacancy."

"So it's not that we're necessarily allergic to the vacancy but we need to take a realistic approach of what our rent gains are going to be, especially in a softening market,” the executive leasing director added. "Even if I rent it for an 8 percent increase, I could still be looking at a 12 percent annual loss in cash," by the time lost rent and other expenses such as turn costs, marketing and brokerage fees are added in.

Treating Vacancy Allergy with LRO

As far as their use of LRO, Vacancy Allergics generally set up the system to start backing off prices at lower exposure levels. They want the system to be very responsive to competitive price changes, especially price reductions. They tend to look very closely at the decisions the last 10 or so prospects made when presented with pricing. They’re going to be aggressive in cutting the price should vacancy begin to rise at all.

While most multifamily assets operate somewhere between 5 and 8 percent exposure, the Vacancy Allergic will typically back off pricing if a community reaches 4 or 5 percent.

At the multi-building group mentioned above, "we generally try to be a minimum of 97 percent rented, and then our occupancy generally trails 2 percent behind that, because people still have to move in," the executive leasing director said. "In looking at our history and what our renting pace is, those are numbers that we have become comfortable with. We are comfortable both in our ability to manage this target and to still be able to take advantage of opportunities to lift pricing and have strong rent growth."

A Good Long-Term Fit

Looking ahead, the company foresees remaining a Vacancy Allergic throughout the New York City region. For starters, the company is a long-term owner of its assets and is therefore generally not looking to push rents as it might if it were readying a property for sale.

Secondly, in the market surrounding the 10-building property mentioned, the competition is growing as more units are coming online. "The amount of inventory that's coming online in this area over the next 10 years is something like 20,000 apartments. Ten years ago, it was probably 10,000 total so it's a huge swell of growth in residential offerings in the area, so it's highly competitive. It's highly priced, and vacancy is expensive. In a submarket where we used to account for 50 percent, all of a sudden we're going to account for maybe 20 percent or less."

Summing up their philosophy, the executive leasing director noted, "We don't approach it with an ego. Not all trees are going to grow into the sky, but the one thing I know about this business is you never replace a day of lost rent."

 

Next up on our comprehensive tour of the pricing archetypes is the final archetype: the Lease-Up. For more details of the original study, please read Pricing Behaviors: Identifying Multifamily's Pricing Archetypes.

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