Since the Great Recession, the multifamily industry has seen an unprecedented bull run on rent growth. Rents have grown as operators have enjoyed pricing power from supply-constrained conditions in most apartment markets. Pricing power is crucial to all revenue management decisions, and today there is evidence that it has weakened for operators across entire markets.
Multifamily renewals provide a good way to judge pricing power: in particular comparing rent prices of new leases against rent prices of renewal leases. When new rents are equal to or lower than renewal rents – the logic goes – pricing power is with renters and prospective renters, as operators are unable to achieve a premium.
This is one of many reasons why multifamily renewals are worthy of more attention than they currently receive from most operators. This is the first of a series of blogs that will examine the state of renewals pricing, and what it will take to bring the practice to the same level as that for new leases. We think it’s a great time to be revisiting this area, with the market for new leases softening and the importance of renewals growing as operators work harder to retain residents.
In this initial post, we will show how changes in who has the pricing power underscore the need for a revamped renewal process.
Pricing Power in Atlanta, Dallas and Boston
To help create a stronger understanding of how new and renewal pricing compare, we conducted analysis of actual lease data for three markets – Atlanta, Dallas and Boston. Figure 1 illustrates the pricing power trends for a stable but healthy Atlanta market. New leases are higher than renewals in the spring and summer months, implying apartment operators have power over market prices during this time. This is intuitively correct, as these are traditionally peak renting months, so operators have the freedom to raise prices for new customers.
In the months of lower demand, new lease prices are approximately the same as renewal rents. We take this to mean that property managers do not want to risk long-term vacancies on their exposed units and are taking a more conservative approach to new rent pricing, charging about the same for a new customer as one they already have.
Figure 1: Analysis of the Atlanta Multifamily Market
By contrast, Figure 2 provides quite different results from the same analysis of new and renewal rents for the Dallas market. In Dallas, new rents were consistently lower or approximately equal to renewal rents across all seasons. While individual sub-markets may vary, overall pricing power appears to be with the customer. In this environment – which may become increasingly normal in the short-term – renewal pricing takes on an even greater importance than usual.
Figure 2: Analysis of the Dallas Multifamily Market
Finally, Figure 3 shows the same analysis for the Boston market. In this case property managers appear to be setting new lease prices below those they charge for renewals, suggesting a stronger shift in pricing power away from the operators and onto customers than the Dallas example.
Figure 3: Analysis of the Boston Multifamily Market
The Dallas and Boston examples both appear symptomatic of the post-Recession boom coming to a close. New units are coming online at fast rates and consumers have more options than ever, increasing the risk of exposed units becoming vacant for longer and decreasing the pricing options for new lease offers.
These three examples provide some insight into the interplay between new rent and renewal pricing. Although the findings are intuitive, companies don't always monitor these trends systematically. It is now more important than ever to monitor the behavior of both new and renewal rents and to tailor renewal pricing processes to reflect changing markets.
In the next installment of our blog series on multifamily renewals, we'll explore what makes renewal pricing unique in multifamily revenue management.
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