The scout motto “Be Prepared” is used by millions of boy and girl scouts across the world. The sentence, although short, carries quite a bit of weight. It is a call to action to anticipate upcoming situations and to be ready to handle anything that happens. It means looking forward to the future and not just living for today.
This motto can be applied to the current state of the multifamily housing market. The industry enjoyed tailwinds in the midst of the housing collapse. Since the housing collapse, the multifamily industry picked up the ball and ran to the goal line every year, without looking back. While most in the industry are still experiencing growth, now would be a good time to regroup and begin planning for the future.
Is the multifamily housing party over?
Not exactly - instead of the booming base of the bull market enjoyed over the last few years, the “housing party” can transition into a dinner party where every detail has been planned and accounted for, with the right data and tools.
A recent Wall Street Journal article predicted, “over the next three years, developers are expected to build over one million apartments in the U.S.” The lease-up boom is attributed to the trending rise in rent. Since the beginning of 2010, rents have increased more than 20%, with an uptick of 4.6% just last year. Many believe the rental market and rental rates will continue to increase if not remain at a profitably steady pace over the next 5 years.
Investors are betting on millennials who are ditching the notions of commutes and instead are opting for living in spaces that reduce their carbon footprint and increase convenience. The rise of live, work, and play developments have become major hubs for those wanting to live in the city. Even older, retired individuals are choosing a simpler life, one where they don’t have to worry about taking care of a lawn. This trend, many believe, will continue far into the future.
On the other hand, lease-ups in urban areas are luxury developments that are commanding far more expensive rents than many residents can afford. In some cities, monthly rents require that residents gross 2-4 times the median income of the area to afford to live in the new developments. There is also a growing concern over the trend of developers, who typically specialize in office and commercial properties, transitioning to multifamily housing developments. Their interest in the millennial and senior migration to urban city centers could potentially saturate the market and create an overflow of inventory. According to National Real Estate Investors, “Demand for new units should remain strong, but not quite strong enough to keep the vacancy rate at its historic low.”
Preparing for fluctuations in demand with a lease-up strategy
Now is the time to create a strategic pricing plan that will balance exponential growth with the slower pace of the future. With such uncertainty in the market, the price paid for being unable to effectively plan for upcoming positive or negative demand trends, could be detrimental. As rents remain high, residents will begin to consider their options and question their cost of living expenses. This could lead to a decline in multifamily housing occupancy making it imperative that operators with lease-ups build an operating platform that can react quickly to changing market conditions during their lease-up.
Intelligently managing pricing is a key component of such a platform. A pricing and revenue management system that is customized to help you analyze area competitors and rents will give your property a better understanding of the future in order to develop the best pricing strategies. The question of whether or not there will be a decline in rentals is not if, but when. Preparation for the when is key for the continued success of your properties. “Using LRO for lease-ups is a no-brainier. Lease-ups have specific strategies tied to unit deliveries, absorption and pro-forma rents. These strategies can be incorporated within LRO to ensure asset strategy and optimal pricing are in sync," says Emily Mask, Revenue Manager for ECI Group.
Regardless of the ebb and flow of vacancies and rental rates, there will always be a demand for housing. Positioning yourself to remain profitable in every climate is the key to longevity. Do you have the tools and data required to remain positively agile throughout the coming changes?
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