Is resident turnover a good thing or a bad thing for an apartment property?
While low turnover – or high retention – decreases vacancy cost and secures a steady revenue stream, it also could limit rent growth potential. Conversely, high turnover could pay off handsomely if the depth of demand is there to absorb it. The operator is the one who determines where the tipping point is.
Currently, the resident retention rate is trending upward.
Despite seasonality, resident retention rates have been climbing across the country for the past five years. Most recently, 50% of all expiring leases in December 2015 were renewed, meaning that half of renters chose to stay put rather than move out. With that renewal rate, December marked 23rd monthly renewal rate of 50% or higher in the past 24 months. In addition, the U.S. apartment market has recorded year-over-year increases in monthly retention rates in each of the past 32 months.
Those figures are based on a same-store set of apartment units utilizing RealPage software products between December 2010 and December 2015. (RealPage services 10 million units domestically.) Apartments in the dataset are professionally managed and tend to be of institutional quality.
The monthly numbers for the U.S. market are one thing. But certain metros deviate from the U.S. norms over time. MPF Research decided to look at which markets had the highest and lowest resident turnover in 2015. We compiled turnover rates for the largest 50 metros for calendar year 2015. The metros at the top and the bottom of the list have commonalities geographically, demographically and economically.
MPF Research did a similar analysis last year on the similarities between markets with highly mobile and immobile renter bases. And while the most recent findings showed some variability with the metro list, the underlying fundamental drivers are still the same. The first driver is median age.
It may seem intuitive to think that younger people are more mobile and therefore less likely to renew. But even when aggregated up to the market level that fact is still true. All else being equal, markets with a young median age also tended to have lower retention. Younger people are less likely to have children, more likely to switch jobs and generally have accumulated fewer possessions. Conversely, metros with older populations tended be less mobile. The one exception in this case was Tampa Bay, which despite its transient population, has one of the highest median ages nationally, at a little over 42 years old.
The second commonality was related to economics. Mobile markets are not only younger, but they also tend to have stronger job growth. This trend was uncovered in the previous study, and despite a slightly different market mix, it still holds true. During the last three years, the U.S. has added about 8.1 million jobs, taking the national unemployment down about 300 basis points, to around 5.0%. Markets with stronger job growth tend to have higher mobility because people move to live near where they work.
Geographically, the South and West regions tended to have higher employment growth. That growth provided a broad tailwind for deeper apartment demand, which led to higher turnover. Nationally, however, resident turnover continues to trend down.
The overall trend: Younger metros with higher employment growth tend to have a more mobile renter base.
To get back to the original question – Is turnover a good thing or a bad thing? Yes, it depends. But the operator never wants to leave money on the table. Operators must walk a thin line in their renewal pricing and expiration management strategies, looking for opportunities to push rents without tipping the scale.
At this point in the cycle, is low turnover necessarily a good thing? As we look to 2016, higher retention targets might be encouraged as new supply levels are expected to peak. Increased competition at the top end of the market will test the depth of demand, leaving room for competitors to undercut on price. A risk-averse strategy could be to ride out the supply boom with longer lease terms and softer renewal pricing to ensure tight occupancy. Meanwhile, operators in markets with robust economic growth and younger demographics might be able to risk higher turnover in exchange for revenue gains.