Quick COVID-19 Action Preserves Multifamily Investor Rental Income

Topic:  • By Ken Lodge and Chris Neumann • June 26, 2020 Views

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Thanks to COVID-19’s contagious nature and fiscal consequences, real estate asset managers had to act quickly on a myriad of property management challenges to protect multifamily investors’ capital. With millions out of work, we faced two issues: maintaining occupied units to collect rents over the short-term and building demand in a changing market long-term.

First Movers Capture Market Share

In a typical month, we collect 99% or more of all rent. But as the pandemic hit and the economy faltered, rental collection rates at some communities fell to the high eighties and low nineties. In mid-March, with the spring rental season looming, we decided to be responsive on rents. The goal was to “buy” occupancy rather than raise rents, thereby offsetting the risk of delinquency and keeping rental income to multifamily investors stable.

Many setbacks can compromise a resident’s ability to pay rent, ranging from losing a job to paying for childcare as schools closed. We wanted to head off rent delinquency for reliable tenants in extraordinary situations. Onsite property managers at each of our 15 multifamily properties had the authority to enter into payment plans with residents who could prove financial hardship due to the impact of COVID-19.

Early after the onset of Coronavirus, we recognized these setbacks would eventually drag rental rates lower market wide. Anticipating this, we proactively lowered our rental rates ahead of our competition. At certain properties we offered up to two months of free rent as an incentive to move in. The benefit of this early move was to shore up our properties’ occupancy rates. With greater demand at a lower price, we could fill our communities quickly at a critical time.

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The Origin IncomePlus Fund is now accepting new investors.

In a down market, apartment vacancies compound the impact of any rent delinquency or collection issue. Sacrificing the potential for higher rental rates in the immediate future has brought in more rental income and insulated our 15 multifamily properties from rent disruption. Acting quickly to boost and maintain occupancy allowed these assets to take market share from competitive properties. Early movers like us will then be in a better position to push rent higher when demand revives.

Historically speaking, residents are typically offered a renewal lease with a rent increase of around 5% to 6%; early in 2020 the average increase ranged from 2.5% to 6.25%. In March 2020, we made the decision to “close the back door” – or ensure a higher retention of expiring leases – by offering renewals with no rent increase. At the same time, we brought new tenants in the front door by dropping our new lease rates by as much as 5%, with one- or two-months’ free rent as move-in incentives. The trade-out rate on new renters averaged 2.2% lower from January through April 2020.

Even in the short term, this strategy – in hospitality shorthand, putting “heads in beds” – was successful and had a powerful impact on maintaining rental income. Despite the forced closure of our leasing offices as a result of COVID-19 in April and May 2020, our pricing tactics and efforts focused on virtual apartment tours resulted in one additional lease per week, on average, as compared to April and May 2019. Moreover, our flat renewal rents resulted in our highest portfolio resident retention to date, as we renewed 54% of expiring leases during the second quarter of 2020 (market retention ranges from 45%-50% on average).

The net effect of these efforts, as illustrated in the charts below, was an overall increase in revenue per square foot for the Origin portfolio of 2.4% despite new lease trade out of negative -2.3% and renewal trade out of 2.7% (note that renewal growth for the year is positive, as many residents had signed renewal offers prior to the outbreak of Coronavirus).

Quick Action Raises Occupancy Rate

In one example from an Origin property, one particularly difficult floor plan has historically taken 63 days on average to lease. As a result of our pricing tactics and leasing incentives, we were able to lease all available units of that floor plan in 45 days during the pandemic. By discounting, we effectively saved two full weeks of rental vacancy loss—capturing more rental income than if we had left units empty to hold out for an increase over previous rent levels.

Other multifamily properties in our portfolio called for alternative measures to lower rental vacancy rates. For example, properties with residents in the service industry—located near a regional mall or a tourist destination—were more at risk for rent disruption. Incentives were more aggressive at these properties to fill apartment vacancies. One such community quickly climbed from 88% to 97% occupancy.

Overall, the pricing strategy raised occupancy rates by 2.8% and reduced rent rolls by 0.6%. Despite this, revenue per square foot, which includes occupied and vacant apartments, rose 2.4%. We evaluated pricing constantly, and continue to do so, raising or lowering rents in line with demand. One of our Atlanta apartment communities signed enough April leases for us to increase our asking rents by 3.5% in May 2020.

Marketing Increases Properties’ Reputation and Demand

While many renters are likely to stay put for now, we must deal with the harsh reality that COVID-19 is accelerating demand for single-family homes away from the density of cities and with more space for remote work, National Real Estate Investor notes. Maintaining apartment occupancy when demand goes slack will require more aggressive marketing to control or increase market share.

To do this, first and foremost the community has to stay visible. Again, we started early and used an array of tactics to entice apartment hunters and keep them engaged to increase demand for Origin’s units. One effective tactic has been to raise referral commissions paid to realtors and locators. In a typical environment, locator commissions for realtors can be equivalent to as much as one month’s rent. At many communities, we raised those commissions to 125% to 150% of the first month’s rent so that agents had an incentive to bring prospective tenants to our properties.

Online listing sites also can generate higher traffic. Sites offer premium placement to feature listings to more searchers or place them higher in the search results. We use sophisticated marketing databases that rely on artificial intelligence to predict where prospects are searching. This enables us to strategically place marketing dollars in real time on platforms that will be most effective at reaching prospective tenants.

Real-time live recommendations via website chat features are another way we spur demand, as they are respected by prospective tenants for their authenticity. They allow prospects to ask current residents of Origin communities any questions they have about the community. The residents who participate are incentivized for each new prospect they convert.

Finally, exceptional customer service is mandatory for all of our onsite property management teams. To ensure excellence, we use secret shoppers to see how quickly leasing agents follow up on website leads and how well their virtual tours showcase units. Our onsite property managers raise their community’s social media profile and build relationships with residents that can help minimize the risk of rent collection issues.

As real estate asset managers, we believe it’s critical to take every opportunity to make the apartment discovery process distinctive. We also firmly believe that investing in virtual leasing and digital marketing now will pay dividends in the coming months, and well after Coronavirus becomes an unpleasant memory. Keeping rental vacancy low may prove more challenging as renters re-evaluate their living arrangements coming out of the pandemic. Early action to stabilize rental income and continuous monitoring of the competitive landscape gives us more flexibility in our response, including an early return to higher rents, thus increasing returns for Origin’s investors.

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Posted By

Ken Lodge and Chris Neumann

Ken and Chris are Senior Associates on the Investment Management team. In these roles, Ken and Chris are responsible for the execution of asset-level strategies and business plans utilizing operational and financial analyses.