Renter turnover is inevitable. Unless rents are absurdly cheap, people are going to come and go. It’s the nature of the multifamily industry.
But what does the turnover ratio tell us?
Turnover is a measure that defines whether a resident chooses to renew their lease or to move out. The terms “turnover” and “retention,” while opposing concepts, are often used interchangeably. Low resident retention indicates high turnover and vice versa. All other things equal, the rent roll of an asset with high turnover will churn more often. But that’s not necessarily a bad thing. Cost-conscious operators argue that resident turnover should be minimized whenever possible. After all, vacant, unleased units are a deadweight loss on the rent roll. Meanwhile, revenue-focused managers argue that aggressive rent growth is best achieved through strategic and efficient turnover. The goal here is to push rents hard enough but still avoid a mass exodus by staggering expirations and maintaining sustainable capacity.
Nationally, renter turnover has historically hovered around 50%. And while that has evolved over time, it remains fairly predictable that roughly one-half of all apartment residents will choose to renew their leases, while the other half will move out.
Why does the resident retention rate matter? It can serve as a meaningful gauge for an investment manager to use in conjunction with his or her bigger operational picture. Line items related to turn costs are some of the primary contributors to operating expenses. Move-outs don’t just add to vacancy loss. They also increase marketing, maintenance, and utilities costs. The likelihood of a renewal should not be used in isolation, but rather should help mold the mosaic theory of an asset’s relative performance. Factors such as single-family prices, government subsidization, crime rate, walkability, amenities, customer service and cleanliness, among others, influence a resident’s likelihood of renewal. But these are not strong predictors at the market level.
Our research shows what does and does not correlate with resident turnover. We ranked the top 50 metros in terms of their renewal conversion rate in the year-ending June 2017. The top 10 and bottom 10 were grouped together to visualize how they relate to other indicators.
Which Factors Influence Resident Retention?
The first data point, employment growth, tends to be a strong predictor of resident retention. Intuitively this makes sense. People want to live near where they work. And areas with robust employment opportunities see a higher degree of mobility. In fact, over the past two years, markets reporting the lowest resident retention averaged cumulative net job growth of nearly 6%. On the flip side, turnover tends to be less prominent in metros with fewer employment opportunities. High retention markets averaged about 1.7% net employment growth over the last two years. Residents in these markets tend to stay put longer.
Another measurement that correlates with the resident retention rate is median age. Simply put, mobility tends to decrease with age. This makes sense intuitively. High turnover markets have an inherently younger renter base and a higher degree of mobility. The transient life stage of younger people make them less likely to have children and more likely to switch jobs. Renter mobility is clearly evident when looking at the metros’ median age. Cities with the highest retention also tended to have an older median age than those where residents were likely to move out. In fact, five of the 10 low-turnover metros reported median ages of 40 years or higher. Meanwhile, none of the cities with high turnover reported a median age above 38. The one exception was Tampa, which has one of the highest median ages nationally (43 years old). On the flip side, Salt Lake City was another outlier, reporting one of the youngest median ages in the country at 29.6 years.
The final angle in the retention triad is supply growth. New apartment supply growth tends to correlate highly with a market’s level of renter turnover. Conceptually, it makes sense. As new apartments open up, renters have more choices of places to live. This creates a more competitive leasing environment. Many of the high-turnover markets have also been development leaders since the current cycle began in 2010.
This inverse relationship between retention and development is especially pronounced when looking at submarkets where a bulk of the new supply in those high-development metros is being delivered. In fact, Charlotte’s Uptown/South End, Far Northwest San Antonio and Downtown Denver have all experienced some of the strongest inventory growth nationally. Combined, these three submarkets recorded resident retention of just 41% during the past year. That means only about four of 10 residents in those submarkets renewed their lease upon expiration. By comparison, the average retention rate is 60% or higher in low-development markets overall.
Which Factors Do Not Correlate With Turnover?
While the primary indicators are interesting, it’s also insightful to see what does not correlate with renewal conversion. Some of the more obvious are median household income and income growth, which can vary wildly by market independent of how long a renter might stay. Income levels are primarily a function of other factors – like single-family prices, housing demand, employment opportunities, cost of living and the tax environment – which median age and job growth don’t directly capture. Resident turnover is an effect, not the cause, of a market’s underlying demographic and economic drivers. Income levels and income growth were all over the board for both groups, indicating no correlation. Simply stated, the cost of living has virtually no statistical relationship to the likelihood of renewal.
Rent growth, also, did not correlate strongly with renter retention. While the average rent growth in the high-turnover markets averaged 110 basis points greater (4.4% vs 3.3%), the metro-level results were divergent. San Antonio, for example, consistently reports the highest resident turnover nationally. However, it also recorded one of the lowest annual rent growth figures (2.1%), primarily a result of a supply-induced slowdown. It had the second highest annual inventory growth rate most recently, behind Charlotte. Conversely, San Diego and Phoenix, which also reported very high turnover, recorded annual rent growth two to 2.5 times higher than the Alamo City metro. The same juxtaposed trend is also seen in low-turnover markets like Cleveland (0.5%) and Minneapolis (4.9%). Simply put, rent growth levels tend to have a lot of variabilities and don’t correlate with the level of renter turnover.
As stated earlier, resident turnover will significantly impact gross potential revenue. Turn costs carry some of the most expensive operating expenses. But the goal is not 100% resident retention. The ideal balance is offering exceptional renter value while simultaneously testing the market with rent increases using a foundation of robust, granular data. It’s important for investment managers to understand market-level economic indicators that drive performance at the asset level. Leveraging relevant market data can add tremendous insight into a manager’s operational decisions, regardless of whether the asset is in high-turnover Denver or high-retention Chicago. And resident turnover, while not a primary indicator, can be a useful gauge for operators who want to target an anticipated vacancy loss while simultaneously pushing revenue growth.