By Nate Gant, SVN Cornerstone Advisor
In my daily conversations with owners, I have recently been asked a question that was essentially irrelevant 12 months ago: “How do I fill my units?”
A little over a year ago, owners were receiving 40+ applications per vacancy. Now, listings will sit and the landlord is forced to search for those qualified tenants. However I have helped some owners figure out a way to not only fill units, but achieve premium rents.
The laws of supply and demand are absolutely in full effect right now. Since 2019, in Eastern Washington, tenant demand grew exponentially while the housing supply continued to diminish. In response to this demand and to steadily rising rents, developers began to build multifamily units to meet the need. With 2,908 multifamily units under construction, we have started to see the effect on our current inventory. Vacancy rates have climbed from roughly 1% in January 2022 to just over 6% in the last 12 months.
Potential tenants now have options, and the market has begun to shift. I spoke with a seasoned operator last week who told me that for the first time in his career, a tenant prospect called and asked him “is there room to negotiate on the lease rate?” He quickly explained that doing so was unheard of. The prospect thanked him and kindly hung up. The landlord never heard from the prospect again and he was forced to fill the unit a month later at a lower rate.
This is a common theme right now for landlords: Concessions.
The list below outlines some constructive ways landlords can incentivize prospective tenants. These tactics can also help keep your property values as high as possible if you need to refinance or are looking to sell in the next few years.
-
- One or two months of free rent: You take all your lumps at once, yet typically you can achieve higher rents throughout the life of the lease. This demonstrates a higher income over the long term for banks, buyers and you as a landlord.
- Free garage use for six months: If you typically charge for garage space consider offering a period of free garage use. Again this will keep your Rent Roll higher by filling the unit while only taking a short term loss on the garage.
Lowering the monthly lease over the life of the lease: This is the least ideal situation, as the goal should be to fill the vacancy but to keep the rent roll as high as possible over the long term.
Case Study
During my routine research into current rental rates, I have found that landlords expectations for tenants have changed dramatically since 2020. Below is a case study to demonstrate:
A Class C apartment building was recently listed, offering 400 SF studio apartments for $750/mo. This lease rate is considered below market and the building has three vacancies, which represent 10% of the building. My question is why?
In this scenario the landlord is requiring a minimum 650 credit score, first and last month’s rent, a security deposit and a non-refundable cleaning fee. This totals close to three months rent for a prospective tenant. This is also a higher than average credit score for this building class. After speaking to the owner of the building, I learned that he has been experiencing 10%+ vacancy rates since January of 2023, and a higher than average turnover rate.
I was determining that rents had hit the ceiling and were coming down quickly. Then, a few days ago, I spoke with an operator who has hundreds of units across multiple states. He explained that he is having new-found success, has grateful tenants, and is NOT giving any monetary concessions.
This seasoned landlord decided to concede, not on rents, but on who he rented to. He explained that he no longer requires a minimum credit score. He has found that by looking at the entire credit report he is able to find excellent tenants even though some may have had credit issues in the past (for instance, 5 years ago a prospective tenant went through a divorce that caused great financial hardship and led to credit issues).
The owner claims that by actually looking at a tenant’s entire financial situation, he has increased his pool of tenants by 300%, allowed him to remain at less than 3% vacancy rate, and continue to achieve premium rents on his portfolio.
So the answer to your question, “how do I fill my units?” is this: you do not need to accept 8%+ vacancy rates as the new normal. Filling units at premium rates will require creativity on your part, and if you have the willingness to invest a bit more time diving into prospective tenant’s credit histories, it can pay off in the end.
Nate Gant is a commercial real estate broker with SVN Cornerstone in Spokane, WA, specializing in Multifamily and Industrial Sales. With a strong focus on helping multifamily investors maximize their income and financial outcomes, Nate brings a wealth of experience and knowledge to his work. To get in touch with Nate, email nate.gant@svn.com or call 509.993.4440.