Why Apartments Don't Rent and What to Do About It
As the economy cycles so does supply and demand for apartment and home rentals.
This last cycle of overbuilding started when interest rates were at 3% up through the end of 2022. Developers decided to take advantage of the cheap money and match government incentives to build market rate housing. As a result, we created too many housing units in the marketplace. This glut was fanned in some states like Oregon, by lack of population growth (slowing immigration and increased emigration), increased death rates and low birth rates.
Even in states that are growing quickly due to immigration, high vacancy rates can exist due to overbuilding. “As of October 2023, 15 states and the Midwest and South have the highest rental vacancy rates. The Charleston-North Charleston, SC area has the highest rental vacancy rate at 15.3%.” (Construction Coverage)
Other reasons for why units may not rent include:
Seasonality can drive vacancies. Typically, apartment units rented up much more slowly from late October through February every year.
Setting rent expectations too high can scare away potential tenants, especially in markets with abundant options. Developers and newly constructed units tend to drive rents up across all rental marketplaces including existing units, as new construction costs are significantly higher now due to higher interest rates and the increased cost of labor and materials.
Rent ups of newly constructed units can be stymied by an affordability gap. Especially in markets where tenants are rent burdened. Incomes are not increasing as fast as increased rental costs. See reference chart below. (Construction Coverage).
This widens the gap between what landlords need to cover costs and what potential tenants can afford. According to the U.S. Department of Housing and Urban Development (HUD), a household is considered rent burdened if they spend more than 30% of their income on rent and utilities. (NCCP HUD)
Poor management may also create higher vacancy rates. This is often reflected in a lack of attention to curb appeal: A neglected exterior, overflowing garbage bins, or overgrown lawns can be major turn-offs. Landlords need to prioritize curb appeal to make a property more inviting. In addition, units that are tired, reflected by dated fixtures, peeling wallpaper, and dim lighting create a sense of disrepair. Landlords must also upgrade unit interiors such as kitchens, bathrooms, and flooring to attract tenants at competitive rental levels.
In this age of high wages and contact less showings, lack of proper staffing by a property manager, to either show units or embrace tenants virtually can reduce the demand for a property and slow down renting creating higher vacancy rates. In addition, if the staff you have is overworked, rude, and not inviting, tenants will choose to rent somewhere else.
What to do to get units rented?
In markets grappling with higher vacancy rates, the desire by on site managers to lower rents intensifies, driven by the conventional wisdom that rent should not surpass 30% of income. This goal is difficult to achieve, given e continuously escalating construction costs.
This challenge is compounded by a limited pool of tenants capable of affording newly constructed rental units. Strategically aligning rent with market rates and maintaining competitive security deposits emerges as pivotal for successfully renting units.
Post-COVID, accommodating pets proves crucial to the successful rental of apartments, especially in one-bedroom units popular among single tenants who often own dogs or cats. Recognizing this trend isn't just a gesture of goodwill; it's a sound business strategy.
In the current competitive rental landscape marked by heightened vacancy rates, property owners are motivated to contemplate concessions to fill units, with the most significant pressure falling on newly constructed properties. Developers in particular are under pressure to rent units. In their construction financing documents, loan covenants mandate these properties maintain actual and financial occupancy levels above 90 or 95%. This accentuates the need for strategic pricing and tenant-friendly offerings to ensure sustained market appeal and property viability.
Apartments need to offer the basics to get rented.
Offer the basics – Apartments must meet evolving tenant expectations by providing essential amenities. Failure to do so prompts tenants to seek residences that fulfill these criteria as demonstrated in a 2023 survey according to iApartments.
These amenities include:
Touchless self- guided tour options to see vacant units.
Ability to work from Home.
In-unit washer and dryer
Air conditioning
Soundproof walls
Free High-speed internet access
Garbage disposal
Walk-in closet
Dishwasher
Smart locks, smart security, smart leak detection, smart thermostats.
Package control systems
Patio or full balcony
Microwave oven
Enough onsite parking ( more than 1.5 spaces per unit)
Secured parking.
Pre-installed window shades/blinds
Incentives and speed up property rentals.
Rental incentives are tricky. An existing tenant may ask for a special incentive to stay or a lower rent if their rent is higher than the current posted rent. Marketing that calls for excellent communication with your tenants.
All incentives are not the same and may not work in your market, or with your tenant base.
For example, the 10 plex we own had two units vacant for over three months. We discovered that the units took two months to get ready to rent and missed the market ( they were vacant in September and October). So, we tried reducing the rent by $100 a month, but that did not work. We then created a special, 1 month free with a 13-month lease. That did work, and the units were rented. One mistake we made with the special was that the units were rented in November, and we should have set a 14-month lease with one month free, to have the tenant’s lease expire in the spring, when units are easier to rent.
Some incentive ideas that might work for your properties are listed below:
Resident referral program.
Give a free month of rent.
Reduce the security deposit.
Offer longer lease terms.
Offer short lease terms.
Waive pet deposits, 51% of respondents prefer pet-friendly apartments.
Subscriptions to gym, grocery delivery
Develop a strategy aimed at minimizing tenant turnover by incentivizing the renewal of existing leases through concessions.
On the other hand
Property managers sometimes forget not every property owner believes in apartment leasing incentives.
Those that are opposed to rent reduction incentives are concerned by the potential loss in value that comes along with rent reductions. In other words, loss of rental income affects the value of the property, especially as the interest rates increase from the 2022 rates of close to 3% to the current rates that are more than 6%.
More importantly with rent control popping up across the United States, once you set a lowered rent it will take a long time to get back to the levels you need to justify the value of the property. As of December 2023, about 180 local governments have passed some form of rent control. (USA Today)
If an incentive results in higher retention and shorter vacancies, you have achieved your goal.
Conclusion
Depending on the marketplace, the oversupply of apartments that causes high vacancy rates, can be due to the following reasons:
Over building
High cost of rents
Increased emigration
High death rates
Low birth rates
Or a combination of all the above. Property owners and property managers need to first figure out what is causing their vacancy rate and adjust their marketing. In some cases, rental adjustments and other incentives may speed up their rental process. As you can see from the above information this is a very complicated process that needs to be addressed in a thoughtful manner. More often than not, you must test a couple of different approaches till you land on an approach that works.
References:
Aratani, Yumiko, et al. “"Rent Burden, Housing Subsidies, and the Well-being of Children and Youth." National Center for Children in Poverty, Nov 2011, https://www.nccp.org/publication/rent-burden-housing-subsidies-and-the-well-being-of-children-and-youth/
iApartments. “Apartment Renter Preferences for 2023”. iApartment – Smart Apartments. Feb 6th, 2023, https://www.iapts.com/apartment-renter-preferences-2023/
Jones, Jonathan. “American Cities with the Highest Rental Vacancy Rates in 2023.” Construction Coverage, Oct 26, 2023, https://constructioncoverage.com/research/cities-with-the-highest-rental-vacancy-rates-2023
Lee, Medora. “Rent control laws on the national level? Biden administration offers a not-so-subtle push.” USA Today, Sept 5, 2023, (https://www.usatoday.com/story/money/personalfinance/2023/09/05/federal-rent-control-laws-debate/70666376007/)
Clifford A. Hockley, CPM, CCIM, MBA
Cliff is a Certified Property Manager® (CPM) and a Certified Commercial Investment Member (CCIM). Cliff joined Bluestone and Hockley Real Estate Services 1986 and successfully merged that company with Criteria Properties in 2021.
He has extensive experience representing property owners in the sale and purchase of warehouse, office, and retail properties, as well as mobile home parks and residential properties. Cliff’s clients include financial institutions, government agencies, private investors and nonprofit organizations. He is a Senior Advisor for SVN | Bluestone.
Cliff holds an MBA from Willamette University and a BS in Political Science from Claremont McKenna College. He is a frequent contributor to industry newsletters and served as adjunct professor at Portland State University, where he taught real estate-related topics. Cliff is the author of two books, 21 Fables and Successful Real Estate Investing; Invest Wisely Avoid Costly Mistakes and Make Money, books that helps investors navigate the rough shoals of real estate ownership. He is the managing member of a real estate consulting practice, Cliff Hockley Consulting, LLC., designed to help investors and commercial brokerage owners successfully navigate their businesses. He can be reached at 503-267-1909 , Cliffhockley@gmail.com or Cliff.Hockley@SVN.com.
