Insight #1: Throttle Up Your Sun Belt and Suburban Assets
By: Jay Parsons, Andrew Bowen and David Polewchak
In 2020, apartment operators and asset managers largely focused on playing defense amidst a period of tremendous uncertainty. In some spots, defense remains the strategy for 2021.
But leading owners and managers are identifying specific assets in their portfolios primed for growth in 2021. More often than not, they are finding opportunity in the Sun Belt generally and in the suburbs more specifically.
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It's Not Just a “COVID Thing”
It's been well documented that COVID-19 accelerated a decade-long shift favoring both the Sun Belt (where revenue performance consistently outpaced Coastal gateway metros) and the suburbs (which have benefited from strong demand and minimal new supply compared to Urban core submarkets).
We’ll dive deeper into the challenges facing Urban and Coastal markets in our next article and, for now, focus on the good news: Most apartments in the Sun Belt suburbs ended 2020 with healthy fundamentals (including positive rent growth) and should be well positioned for solid revenue growth in 2021.
The migration into the Sun Belt got heightened media focus in 2020, but the truth is that this pattern has been in place throughout the last cycle. This isn’t a “COVID thing.” We’ve been consistently bullish on Sun Belt and suburban markets since the tail end of the Great Financial Crisis, and those forecasts proved largely accurate. In Sun Belt suburbs, RealPage is forecasting rent growth of 1.3% in 2021 and 4.2% in 2022. One big reason the 2021 forecast isn’t more optimistic is the view that operators may still price too cautiously and tepidly – reverting back to manual control over the science of supply and demand.
That means there’s opportunity for apartment operators and asset managers willing to throttle up proactively in 2021 – not just passively wait until all their comps shift gears first.
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How to Create Your “Throttle Up” Asset List
A one-size-fits-all strategy doesn’t make sense in a highly variable market like we have in 2021. Create a group of assets within your portfolio designated for throttling up revenue goals – and execution. Here’s how:
- Look first in growth markets where you’re seeing healthy demand and minimal direct competition with new lease-ups. Drill down to the submarket and individual neighborhood. Even if the overall market is still soft (i.e., coastal market), some suburban submarkets will likely have better conditions.
- Don’t make the mistake of over-weighting comps in your strategy. Top operators are guided first and foremost by internal fundamentals and goals. If you’re letting your comps dictate your pricing and marketing strategy, you’re playing from behind. Most everyone is intentionally pricing conservatively right now, and your goal isn’t to tether to the market, it’s to stay ahead of the market. Additionally, “market rents” rarely align to executed rents on the rent roll.
- At the asset level, look for normalizing demand-side fundamentals – occupancy, exposure, rent-to-income ratios, lead volumes.
- Don’t be scared off by moderately declining retention rates. Retention spiked in 2020 when residents couldn’t or wouldn’t move, and we’ll see normalizing retention rates in 2021. You want to see healthy renewal demand, but don’t use 2020 as the benchmark for normality.
How to Throttle Up Your Target Assets in 2021
Once you have your target list of properties to throttle up revenue expectations, take a comprehensive view of execution strategy. Here are some best practices to consider:
- Think about your marketing, pricing, screening and leasing levers holistically. If you throttle up pricing without throttling up other levers in concert, you’re handicapping yourself.
- Renewal pricing is a good place to start. Remember what we noted earlier: Retention will normalize a bit, but renewal demand should still be strong in most suburban Sun Belt markets. Many of your competitors are still leveraging a one-size-fits-all, straight-line increase approach to renewals even at their highest-demand properties. They are leaving money on the table. Look for opportunities within each unit type and get granular and strategic.
- On the new lease pricing side, first and foremost, focus on your own success and/or struggles. The narrative across the country is going to be about the difficulty around rent growth but that may not be your story. In stabilized suburban and Sun Belt assets, there should be very few cases where concessions are justified. Set price at a floorplan level, and start pushing higher rents on the floorplans most in demand.
- For both new and renewal leases, taper back on target lease term lengths. Remember: Healthy demand into suburbs and Sun Belt markets is not a temporary fad. Demand has been strong and should continue to be strong over the coming years. Leases greater than 12 months in length delay your ability to drive rents in an improving market. Additionally, ensure you are not leveraging lease terms that push availability out of high-demand periods (lease expiration management).
- On marketing and leasing, set your base strategy but then get much more precise. Yet another trend accelerated by COVID-19 was the shift from shotgun spend to rifle spend in marketing. Ramp up direct marketing targeting the right audience, and push to create a seamless, frictionless virtual leasing experience that starts with search and ends with a lease signing. Ensure you are prioritizing the right leads, and put safeguards in place to ensure prospects reaching out to you are not left waiting to hear back from you.
- Look to optimize pricing for amenities and rentable items. When was the last time you did a comprehensive review of amenity pricing? Does your pricing align with demand? Are certain in-unit amenities leasing faster and perhaps warranting a higher price? Are units with other amenities sitting longer – perhaps warranting a lower price?
Lastly, review your strategy and results on a recurring cadence. Fine-tune as you go. But stay disciplined on the core strategy. One of the most common operating flaws is to overreact to small shifts. In 2021, the year of variability, that’s a mistake that can have a profound impact on your bottom line.