Renewal season with three lease-ups down the road: hold rent or hold occupancy

Question

I manage a 208 unit for an owner group and we're going into renewals against three properties within a mile that are all offering six to eight weeks free. Our average in-place is 1,585 and we're at 93.4 percent occupied with 71 units expiring over the next four months.

Asset management wants flat renewals with a 2 percent bump on anyone below market. My site team wants to offer flat plus a look-and-lease waiver on anything expiring in the next 60 days, because our 30 day notice-to-vacate count is already running above normal.

The arithmetic looks straightforward to me. A turn on this property runs about 1,400 all in and we're averaging 26 days vacant, so a move-out costs roughly 2,750 against maybe 380 a year to hold a resident with a 20 dollar concession. But the owner's counter is that every dollar of rent I give up gets capitalized at exit, and they're modeling a sale in 30 months. I don't think either side is wrong and I'd like to hear how other people are running this decision.

Rena Expert · Accepted Answer

Both sides are computing something real, and they're on different clocks. Your number is a cash figure inside twelve months. The owner's number is a valuation figure at a single moment 30 months out.

Run the owner's side explicitly so the argument stops being about instinct. A 20 dollar per unit per month give on all 208 units is roughly 50,000 of annual NOI. At a 5.5 cap that's about 900,000 of value, and on the 71 units actually expiring it's more like 17,000 a year and 310,000 of value. Your turn math on those 71 units, at 2,750 per move-out, says every 6 additional move-outs costs about 16,500 in cash and pulls occupancy down while three competitors are advertising eight weeks free. Which side wins depends almost entirely on whether the exit cap is where the model says and whether rents in the submarket have firmed by the sale date. If deliveries in your one mile radius are thinning and absorption picks up, the owner is right that a low in-place roll is expensive at sale. If those lease-ups are still burning through concessions when you go to market, the buyer is underwriting effective rents anyway and your printed rent roll won't carry the value.

The piece I'd put in front of asset management is loan compliance. Check whether the debt has a DSCR test or a cash management trigger, because a swing in occupancy from 93 to 89 during a renewal fight can trip a covenant, and that costs more than either scenario.

One structural note: concessions on renewals train residents to expect them, and they're harder to withdraw than a rent adjustment. If you must give, prefer one-time credits over lowering the contract rent, because the contract rent is what a buyer capitalizes.

renee_dubois · Answer

The one-time credit versus lower contract rent distinction is the single most useful thing I've picked up on my 11 unit. I gave a rate reduction once to keep a tenant and two years later I was still underwater on that unit because I never got the base back. A 300 dollar credit at signing would have cost me less and left the rent roll intact.

laurenkim53 · Answer

26 days vacant seems long for a property at 93 percent. Is that turn time or lease-up time after the unit is ready?

nicole_adeyemi · Answer

@hollow those get blended constantly in reporting and it matters, because if 18 of the 26 days are marketing time then trellis has a demand problem the renewal policy can't fix. If it's 18 days of maintenance, that's a scheduling and materials problem and it's fixable this month.

On the exit argument, I'd also ask what those three lease-ups will be by month 30. If they're stabilized and the pipeline behind them is empty, they stop being competitors and start being comps that support your rents.

priya_n21 · Answer

I buy into deals rather than run them, and the part that would bother me is that the asset manager's 30 month sale is a plan, not a date. If the market isn't there, the hold extends, and then the flat renewals were the right call anyway. I'd want to know what happens to the strategy if the sale slips two years.

ryanmck27 · Answer

@trellis do the 71 expirations bunch up in one or two months? If 40 of them land in the same 30 days you have a bigger problem than the pricing decision, and staggering some of them into 9 and 15 month terms might be worth more than either the bump or the concession.

Renewal season with three lease-ups down the road: hold rent or hold occupancy

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