Why create strategic vacancy? Strategic vacancy is always planned and has a purpose. Usually, that purpose is increasing rents.
Rent is not always about price. Your customers are looking for a comfortable place, a peaceable place to reside. If everyone in your market is at the exact same price point, then your potential customers will gravitate to the place they perceive provides the most value at that price.
The “differentiation” you 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” you 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 capture rent growth in your market?
- 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 have no idea about pending rent growth and your assets will miss these gains.
Can you project rent growth coming to your market? If the answer is yes then consider creating strategic vacancy in advance to prepare and capture this wave of cash. Is this a serious statement? Absolutely. Owners do it all the time. Following are a few examples.
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 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 potential rental increases and tie this number to potential renovation items.
Asset Re-positioning. Re-positioning may or may not include a renovation piece. The re-positioning can be solely a cosmetic facelift to the facade or property entry-way points or lots of grass seed, flowers 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. Whereas you will seldom remove an existing resident based on a revision to their credit file, you absolutely will not renew based on their pay history. Sometimes we take a risk, right? Allowing a person to move in that does not fit the rental credit profile is a mistake. Non-renewal based on payment history is appropriate. It also makes the unit available for upgrades and higher rents post upgrades.
One potential objective for creating vacancy is to reduce staff time on chronically slow paying residents. In this example, even if the unit were rented to a different resident at the same rental rate you have gained efficiency because of reduced staff time necessary to pursue collections. Thus, the vacancy created will increase rental revenue with receipt of timely payments going forward.
Whether renovation, re-positioning or lifting credit quality, these are all good reasons to create vacancy that will lead to increasing the value of assets under management. 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?
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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. http://www.MultifamilyInsight.com