Making Concessions

Determine best practices for leasing and renewal incentives to maximize NOI.

Economists are now proclaiming that the recession may be over, just as rental occupancies and rates in some markets are beginning to rise cautiously. Better days may be just around the corner for the apartment industry. And yet, concessions and incentives remain the order of the day. Be it one or two months of free rent or heavy-duty giveaways such as flat-screen TVs or cruises, concessions and incentives are baked into the leasing equation. They’re the unavoidable fact of leasing in an up, down or sideways market, the albatross that seem to be hung around the necks of leasing agents everywhere.

“What’s interesting to me is, renters understand the lingo now so much more than they ever [did],” says Lesa LaRocca, president of Tempe, Ariz.-based Trilliam Residential Communities. “Now, they shoot right to the bottom line with, ‘What’s your net rent?’”

LaRocca says it’s still common to see banners outside apartment communities with such come-ons as, “Three months free rent, $99 move-in.”

“That’s the lowest I ever saw, a $99 move-in, until I later saw a $29 move-in,” she says. “It was actually funny. I mean, how much lower can you go?”

LaRocca says the syndrome is partly fed by pricing transparency; with the Internet, every community’s rates and advertised concessions are available for all to see, and with the economic downturn, all renters are cost-conscious. But with the slight upturn in the economy, and better community performances in certain areas, LaRocca is seeing a shift in how the game is played.

“Once you get down to a manageable inventory, you’re able to play it a little differently,” she says. “Now, instead of making blanket concessions across the board, you might apply one free month to just one floor plan with only a couple of apartments to rent, and reserve two months free rent for the rest of the floor plans.”

Nevertheless, LaRocca notes, the blanket approach remains common, in particular in those areas still suffering. In some sectors, such as Arizona, whose renter base has been decimated by harsh immigration laws, some communities aren’t even requiring security deposits.

A double whammy

Even in healthier geographic areas, the double whammy of concessions and incentives continue to play a vital role. The trick may be in knowing how to package them.

“The best thing to do is look at the goals of the community’s owner, the current market and competitive conditions, and see what you can do,” says Kate Good, a marketing solutions strategist and professional speaker for the apartment community. Good indicates that for communities that are truly suffering—with, say, 70 percent occupancy—straight concessions could prove ruinous.

Instead, she suggests, communities might consider an intriguing variation. “For one community, I just did a coupon book worth about $1,000 or one month’s rent,” Good says. “The individual coupons were worth $30, and the tenant could decide how many coupons to use per month.”

Good says the coupon idea addressed residents’ sense of fear. “Some people want that first month free, and that’s great; they can cash in all the coupons at once,” she says. “But we give them the flexibility. Being in control eliminates fear. The coupon book gives them control.”

Good says once the program became popular, her client started to pull back its value a little, to $600. “People still like it,” she adds.

Sale or sail?

Besides rent concessions, other incentives remain popular in encouraging new leases and increasing resident retention. One of the more popular is free cruises.

“The perception [is that] cruises are much more expensive than they really are,” says Doug Dinnsen, account executive at AIM Cruises. He notes that five day/four night sailings are typically “valued” at $1,798—what many might call the “suggested retail price.” But because of volume pricing and the inevitable vacancies that occur on any ship, apartment communities can purchase cruise certificates from vendors such as AIM for as little as $140.

Dinnsen says his packages offer an 18-month window for the resident to take advantage of a free cruise, so the renter doesn’t have to book his vacation right away.

“It’s not magic, but it is a compelling offer, and at least it’s helpful, depending on the marketplace,” Dinnsen adds.

Another company offering cruise packages to the apartment industry is Cruise4Two. Shawn Sarnecki, the company’s director of marketing, says that with the right demographic, and at the right time, the free cruise offer can be effective.

“I just had a struggling student housing property in Alabama run ads offering free cruises for the first 50 prospects that toured the property,” Sarnecki says. “After the 50 cruises were given away, they then offered the same promotion if the prospect signed a lease. As a result of the incentive, they leased 166 beds in February.”

Sarnecki doesn’t advise his apartment community customers to eliminate concessions in favor of cruises, but rather to offer both in tandem.

But are these evil twins absolutely necessary to the leasing process? If concessions and incentives must be part of the plan, which they usually are, here are some issues to keep in mind:

Amortized concessions. Communities should consider whether or not to amortize concessions over 12 months, which—instead of providing the one or two months of free rent up-front as intended—essentially reduces each month’s rent by the total concession, divided by 12. The upside may be an incentive for the resident to stay for the entire lease, rather than jumping ship after the short concession period. There are also downsides.

“The result with this amortized concession is net rent, ” says LaRocca. “When you take the entire amount and divide it by 12, the discount is taken every single month, and when you do this, the renter is so used to paying the lower rate that he’ll resist going back to market rates.”

One way to avoid this is when renewal time rolls around, indicate to the renter that the unit will return to market rates, but offer another month free, to help ensure the renewal and get the community out of the cyclical amortization situation.

Incentive choices. When offering, or blending in with concessions, some form of incentive, consider what form it might take. While the free cruise is popular, other options may be more attractive, such as upgrading countertops, or giving away flat-screen TVs, iPods and iPads.

“We had this fun scratch-off game where the renter could win a cruise, TV or Flip video camera, along with discounted rent,” notes Good. She adds that, because of sweepstakes rules, the offers could not be linked to an actual “purchase” (that is, a signed lease).

“Yes, there was a little bit of risk,” Good says. “But there was only one case—we gave away a Wii video game system—where the person didn’t rent. All the other items were used as closing tools.”

Leasing vs. Retention. An incentive often is most effective when renewal time comes along. The reason: When a renter is moving in, his main concern is about a change in his life, whether it’s a new job, marriage or school term. Taking a vacation isn’t top-of-mind at that time.

“But for resident retention, the renter is now stabilized and more likely to take that cruise right away,” says Dinnsen. Year-round displays about such a renewal incentive, posted in community rooms and leasing offices, can get people thinking long-term about renewing, he adds.

Staff training. Perhaps the biggest, albeit hidden, aspect of the concession/incentive game is making sure the leasing staff knows what it’s doing.

“Leasing professionals in our industry often are transient, and they’ve been educated to lease using concessions,” notes Tami Siewruk, head of consultancy at Multifamilypro. “Those people need to be retrained to offer concessions only under the right circumstances. That can be a difficult process.”

To comment, e-mail Diana Mosher at [email protected].

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