Apt. Owners Need to Address Trade-Off Between Cash Flow and Occupancies

By Anuradha Kher, Online News EditorBoston–With job losses still high and the economy not yet picking up, demand in the apartment market continues to slow. As vacancies rise, owners need to attract new tenants and maintain existing residents by doing one of the two 1) decrease asking rent or 2) maintain and even increase asking…

By Anuradha Kher, Online News EditorBoston–With job losses still high and the economy not yet picking up, demand in the apartment market continues to slow. As vacancies rise, owners need to attract new tenants and maintain existing residents by doing one of the two 1) decrease asking rent or 2) maintain and even increase asking rent while compensating the tenant with a month or two of free rent, paid moving expenses, or a number of other concessions. In the face of immense declines in demand, apartment landlords are now responding with both strategies simultaneously, according Brad Dillman of Portfolio and Property Research.“It is a tradeoff between cash flow and occupancies and owners need to address that,” Dillman, quantitative analyst at PPR, tells MHN. “The decision depends on the specifics of the owner’s situation, the property itself and if there is a minimum occupancy level that needs to be maintained in the loan contract etc.”Dillman says, as concessions are on the rise, effective rents are decreasing. “Not surprisingly, as the chart shows, effective rents at the PPR54 (54 primary markets that PPR conducts research in) level are falling rapidly compared to declines in asking rents.” Today’s falling rents are not an isolated case. “The chart shows the dollar concessions narrowing during good times and widening during rough times. But even during periods of economic strength, concessions are still present because of their strategic value,” says Dillman. The long-term average of concessions as a percentage of asking rent nationally is 5.6 percent (in dollar terms, $58.98/month). “However, given the current outlook for apartments, we could see concessions nearly double as vacancies climb to record highs of over 9 percent in 2010. With such prospects, apartment owners need to strategize by considering the trade-off between occupancy and cash flow, and their assets’ ability to capitalize on either strategy. It is unlikely that owners can be too aggressive on either!” concludes Dillman.Typically, the less supply constrained the metro is, the higher the concessions are. For instance, in San Antonio, Phoenix, Las Vegas, Dallas, and Atlanta, where it is easy to build, more than two-thirds of units were offering concessions in the first quarter, according to Axiometrics. Stephanie Hession, real estate cconomist at PPR, tells MHN, “Vacancy rates in those markets are structurally higher, and all five markets had vacancy rates above the PPR54 average of 7.6 percent in the first quarter. On the other end of the spectrum, markets that are supply constrained tend to have structurally lower vacancy rates and lower concessions. For instance, concessions and vacancy rates in North-Central New Jersey, San Francisco, East Bay (Oakland, CA), and Boston all ranked in the lowest 10 of the PPR54 in the first quarter.” In those markets, fewer than 40 percent of units were offering concessions and vacancy rates were all below 6.5 percent in 09Q1, versus 57 percent of units nationally offering concessions per Axiometrics.

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