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No, There Aren’t Really Any Rent Concessions in the Apartment Market Right Now

No, There Aren’t Really Any Rent Concessions in the Apartment Market Right Now

It’s September, and that means the apartment sector’s big-time clustering of industry events that occur seasonally in the fall has now begun. Some of MPF Research’s analysts participated in the InterFace Multifamily Texas conference last week and were struck by a fairly odd discussion that suggested rent concessions are beginning to creep into the picture for top-tier apartments. Here’s our take on the topic:

MPF Research’s info shows that use of concessions in the market overall continues to dwindle. Across the 7+ million units that are tracked on a routine basis, the share of product featuring any rent discounts came in at just 8.9% as of Q2. That’s down from figures that had been running at 10% to 12% over the previous year or so. And, in fact, it’s the first single-digit reading for that measure seen since the tech boom of the late 1990s through 2000. The recent peak in use of giveaways came in early 2010, when concessions were reported for a whopping 47.0% of the country’s apartment product.

Furthermore, use of concessions in top-tier properties appears to be a little less frequent than in the middle-market segment. Grouping product by age category, developments finished since 2010 (including the projects still moving through initial lease-up) had concessions in place for a mere 7.0% of the product, compared to the high of 11.2% registering for 1980s-vintage units. (“High” obviously is a relative term there, since 11.2% is a limited share, too.)

Even looking at the brand new properties where pricing features two weeks to a month of “free rent,” calling those offers concessions actually is misleading, according to the operations and property management panelists at last week’s industry event. It’s only a concession, if you’re giving something away. In this situation, the discounts in actuality are a marketing device that has been deployed, since the resulting effective rents still top the pro forma rates that were targeted for most of these new communities.

Certainly the fact that giveaways aren’t needed when overall market conditions are so healthy is the key factor that is limiting rent concessions. Also of significance, the current development cycle really is the first one where the use of revenue management systems that set pricing via sophisticated statistical models is a standard business practice for new supply moving through initial lease-up. Among owners and operators comfortable using revenue management systems for daily rent pricing on their stabilized assets, there’s now widespread understanding of the minor tweaks to settings needed to achieve insightful guidance when pricing properties that are moving through the lease-up process. It’s now typical for revenue management system activation to occur immediately upon initiation of the leasing process for a new development.

Digging a bit deeper into the data on concessions, there are a handful of local markets where it’s justified to say that giveaways are real. In these few spots, discounts are in place for a meaningful share of the product, and the discounts are deep enough to hold effective rent growth to low levels.

Late-to-recover-markets Tucson and Las Vegas lead the list. As of Q2, concessions were in place for 41.2% of the product in Tucson and 34.3% of the product in Las Vegas. Annual effective rent change was actually negative at -0.4% in Tucson and lackluster – but improving – at 1.9% in Las Vegas. (Keep in mind that student housing plays a bigger role in the mix of apartment options in Tucson than in most metros. Thus, Q2 tends to be that metro’s seasonally weak period, yielding product discount statistics that can be especially pronounced during the summer months.)

A metro to watch for rent giveaways is San Antonio, where the 20.5% of product offering concessions as of Q2 about doubled the share from a year earlier. In turn, effective annual rent growth of 2.1% as of mid-2014 was way off from previous levels that had been close to the 4% mark.

There’s some danger that use of concessions will gain some traction in quite a few markets during the last few months of 2014. That vulnerability comes from the fact that properties totaling more than 80,000 units are scheduled to complete at a time when demand tends to be seasonally weak. Even if that happens, however, the jump in concession usage appears likely to end up as a blip-in-time move. Significant rent giveaways are largely out of the picture for the apartment sector until there’s some notable deterioration of overall market health, and that doesn’t seem likely for the foreseeable future.

(Image source Shutterstock)

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