Why would an owner or property manager suggest creating vacancy? Strategic vacancy is always planned and has a purpose. Usually, that purpose is increasing rents, but it could be to retain customers in a tough market where absorption is slow.
As you know, rent is not always about price; we provide a service and our customers are looking for a comfortable place, a peaceable place to reside and security. If everyone in your market is at the exact same price point, then our potential customers are going to gravitate to the place they perceive provides the most value at that price.
The "differentiation" we create can sometimes include nothing more than color or freshness. Other times the changes are more overt like new... everything. Most times these changes are something in between. Tracking changes in rents on a real-time basis allows management to ascertain the potential increase in rents from implemented upgrades.
Once the gap between current rents in "as is" units is measured against potential rents with "upgrades" we have established cause to consider creating vacancy to capture this gap between current rents and potential rent with upgrades. The bigger the gap, the more cause to consider upgrades.
Preparing for rent growth
Are you using tools of the trade to see the rent growth in your markets and submarkets? Are managers performing rent surveys to keep pace with competitive assets? Are your concessions and/or premiums attracting the right customer to your assets? Preparing for rent growth requires a yes response to all of these questions. Without knowing these simple market dynamics you will have no idea about pending rent growth and your assets will miss these gains.
Can you see rent growth coming in your market? If the answer is yes then consider creating strategic vacancy in advance to prepare to capture the wave of cash. Is this a serious statement? Absolutely. Owners do it all the time. Following are a few examples why.
Creating vacancy on purpose...
Asset renovation. Renovation is a relative word. We can renovate individual units and entire complexes. We can tear down to the studs or pick up and replace all the common area floor coverings. Renovation for rent growth can take on any of these facets. Renovation can be minor or major with the presumption that the greater the renovation the greater the anticipated increase in rental revenue from the improvements. Ah, but there is that word- presumption. No one is spending a few hundred thousand (or more) based on presumption. That is why we establish the potential rental increases and tie them to pending renovation items.
Asset Re-positioning. Re-positioning may or may not include a renovation piece. The re-positioning may be strictly a cosmetic facelift to the facade or entry-way points or lots of grass seed and shrubs. Re-positioning can be exclusively marketing or re-branding an asset to take advantage of certain market dynamics.
Removal of low quality customers. We don't remove existing tenants based on what is in their credit file, but we may based on their pay history with us. Sometimes we take a risk, right? We allow a person to move in that does not fit our rental profile from a credit history per perspective. Well, shame on us. If we vary from our own established standards then there will be problems.
Then, down the road, we purposefully create vacancy to remove these same problematic tenants (a problem we created). We notify of non-renewal at the end of the initial lease term. The objective of creating a vacant unit is to reduce staff time having to address chronically slow paying tenants. In this example, even if the unit were rented to another at the same rental rate as the tenant we have ask to leave we have gained efficiency because of having reduced staff time necessary to pursue collections. Thus, the vacancy we created will increase rental revenue based on receipt of timely payments going forward.
Whether renovation, re-positioning or lifting credit quality, you can see there are sometimes good reasons to create vacancy that will lead to increasing the value of our assets. Each strategy requires a well thought out time horizon and quality planning, operationally and fiscally. Each strategy requires its own budget forecast taking into account dips to income during and after implementation.
Question: What other reasons can you share for creating vacancy? Do you have some examples where creating vacancy was a profitable endeavor.
About This Blog
Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily property management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. www.MultifamilyInsight.com
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