3Proportional rent-up

Transcription

1 Apartment Resources A Real Estate Research Periodical Apartment Resources is a monthly publication designed for apartment developers, lenders and builders involved in all forms of multifmaily housing. Volume 3 Number 9 September 1989 PAGE 2 Gap Management Assuring maximum return for special features in a development. 3Proportional rent-up Price and marketing adjustments to assure you aren't left with only one type of unit to rent. 4Consumer marketing Developers can take a few good lessons from their counterparts in retail marketing 4How much is that window? The builder can tell you what it costs to install, but how do you determine how much to charge the renter?

2 Gap Management: The Key to Maximum Profits and Proportional Rent-up Given a choice, most renters will take a twobedroom unit over aone-bedroom apartment any day...until price enters the conversation. Without proper management of the price gap between units,it is likely a developer will end up with one type of unit fully rented and another type very available. The key to proper gap management is to price unit types so that one does not overshadow another in popularity. A developer who is able to lease one of each type unit on the final day of rent-up has achieved a balance in absorption. Too many times, property managers follow only the total absorption figures, while not tracking the individual unit types. In this scenario, the leftover or non-premium units are often rented at discounts, reducing the total income potential of the project. The first step in proper gap management is to calculate a gap that fits the ratio of units. Assuming an even mix of one- and two-bedroom units, the goal is to maintain a 1:1 ratio in the rental of each type. Assume that research indicates a gap of $75 between the rental rates of those units that will yield the perfect ratio. All other things being equal, as long as that gap is maintained, the development will show a balanced rent-up. Management of the price gap becomes more important and much more sophisticated as the mix and the number of unit types vary. If the project has a mix of 25% one-bedroom and 75% two-bedroom units, then the gap would need to be adjusted downward to increase the pace at which two-bedroom units are rented. For precise control over rents, effective gap management must be practiced with each different unit type. To see the results of alterations in marketing and pricing tactics, each type rented must be tracked as a percentage of its specific type of unit not as a percentage of the total development. Townhomes generally rent for different rates than garden units. End units and those with exceptional views may rent for more than those facing the parking lot. Every unit that, for some reason, carries a rent different from the others, requires gap management and will be impacted through a ripple effect by any changes made in the marketing or pricing of the other types. To assist developers in achieving a balanced absorption at maximum rent levels, The Danter Company has designed the Project Opening Plan (POP), a year-long monitoring system for a new multifamily project s rent-up process. The information required to determine the proper price gaps is generated by analyzing 100% of the competition. This establishes the proper values that area renters place on amenities and different unit types. Gap management techniques can also be applied to projects already in the rent-up process. 2

3 POP: Continual Price, Marketing Adjustments for New Projects The pricing structure that seemed perfect for the opening day of rent-up may now be invalid because of the nearest competitor s end-of-the-month special promotion. And the other new project in town has opened a month early. Achieving a balanced absorption requires knowledge of tenant preference, area demographics, marketing effectiveness, competitive projects, and their marketing strategies. The Danter Company s Project Opening Plan (POP) monitors these and other factors to provide a basis for rent and marketing strategy adjustments to respond immediately to changes in the market. To achieve maximum rent levels for the development, management must be ready to alter pricing and marketing strategies at least on a weekly basis. The POP analysis begins 30 days prior to the opening of the project and continues for 12 months after opening. Among the keys to the plan are the information gathering processes, the ability to make changes quickly and exercising the right level of caution to not overreact to changes by competitors. (See box) The basic methodology calls for analyzing these factors for all other developments in the Effective Market Area (EMA). An EMA is the smallest specific geographic area that will generate the most support for that development. The EMA is continually measured and evaluated through the Visitor Registration Analysis. This offers feedback on the market reach of the project and is produced every other month during the POP project. The POP Analysis consists of six periodically updated components: Visitor Registration Evaluation A data-base evaluation of advertising impact, potential preferences, and the geographic distribution of visitors. Telephone Survey of Visitors An in-depth profile of visitors that establishes potential tenant house- hold data. Factors include age, income, employment, and number of persons per household. Further, the survey establishes visitors percep- tions of the study project and of competitive projects within the market area. Area Apartment Analysis An analysis of changes in competitive project rents and vacancies and profiles of new rentcompetitive projects entering rent-up. Project Shopping Report Unannounced evaluation of: the development s roadways, grounds, overall appearance, rental office and model unit; and the rental agent s unit presentation, tenant qualification and telephone techniques. Profile of Tenants Approved tenant applications are tabulated to establish the profile representative of market segments at the subject site. They can then be compared with the visitor profiles and identify any market weaknesses. Analysis of Product Absorption A weekly tracking of unit absorption, with each type of unit individually tracked. The analysis includes recommendations for rent adjustments required to balance absorption. 3

4 Multifamily Builders Need to Focus on Consumers Traditional tracking and marketing techniques employed by makers of consumer products have been shunned by developers, many of whom saw price and location as the only factors in successful rent-up. Since the location can t be altered once the project is built, most marketing strategies have used only price cuts as incentives for increasing occupancy in troubled units. With the emphasis on net operating income now more than ever before, multifamily marketing must become more sophisticated. Among proven consumer tracking methods is analysis of local newspaper advertising. Research by The Danter Company has shown that analysis of aggregated competitive advertising components provides useful information concerning market status and future trends. Advertising trends, especially those concerning rents, discounts, rent incentives, location and size are noted in the data-base analysis for the POP program. This analysis enables project management to anticipate marketing problems and assets, and to adjust the advertising objectives for the development. A recent analysis conducted by The Danter Company indicated that 20% of all advertising space by competitors featured the lifestyle offered by the developments. The telephone survey of visitors to the sample development showed that location and recreational facilities were the two most important amenities cited by more than 48% of the visitors. On the flip side, price and floor plan were cited as negatives. The good project manager knows which elements can be adjusted quickly and which ones are inherent to the development but can be altered. Age is another key demographic factor that often goes unanalyzed. The Danter Company s historical research shows that seniors rent from the fornt of the development to the back, while the younger crowd rents from back to front. If the visitor profile shows that you are attracting a substantially higher group of one age group over the other, the pricing should be adjusted accordingly. Under ideal circumstances, effective gap management will identify a property s consumer strengths and weaknesses before time and money are wasted on misdirected marketing programs. Perception Not Cost Sets Value of Amenities The developer seeking to maximize the income potential of a new project always asks, How much do I want to make from this extra item, and how many people will pay that? Too often, property managers try to adjust price gaps between unit types and amenities based on the true cost of the item or a standard formula. Neither is likely to work. POP Results, aggregate data gathered from Project Opening Plan (POP) surveys that The Danter Company conducts for clients, consistently show that the value of an amenity is strictly in the eye of the individual. Perceived value must be measured constantly to set accurate pricing levels and to exercise appropriate gap management. Given the complexity of determining these value levels, we use comparative shopping reports, an analysis of the EMA, and area advertising/ marketing evaluations. Our studies have shown three basic features as being the most consistently valued by tenants nationwide closet space, volume on entry, and a second bedroom. Deciding just how much tenants value these features and will be willing to pay what you want are two different problems. The goal is to measure in real dollars the effect of adding an amenity. Architects and designers usually never receive direct market feedback on the design. 4

5 The REAL/LINE Connection New Cities added to system We re constantly updating the market studies available on the REAL/LINE network and adding new cities. Three new market reports are available this month: o Columbus, Ohio East 07 o Columbus, Ohio East 06 o Merrillville, Indiana The first of the Columbus reports covers the southeast Columbus area and includes Groveport and portions of Columbus south of I-70. The study encompasses 5,985 rental units in the area. The second Columbus report covers the area north of I-70 and includes a portion of the Whitehall area. More than 5,400 units were studied for this report. For Merrillville, the Effective Market Area surveyed is bounded on the north, west, and south by the Merrillville corporation limits, and on the east by I-65. A total of 3,418 units are covered by the survey, with an overall vacancy rate of 1.5% noted in the final report. Immediate access to comparative data Among the analyses available through the REAL/LINE system, is the Apartment Regression Analysis, which measures competitive market rents within the area, based on rents and amenity indexes of all area projects. With the regression analysis, developers and lenders can easily estimate rents for a proposed project. Once you access the REAL/LINE system, the computer program and its printouts will guide you step-by-step through the process of evaluating your own proposed project. If you would like more information on amenity indexes and evaluating amenities in your market area, please don t hesitate to leave a message on the REAL/LINE system. Total Field Survey A must to Set Gaps Gap ratios are not part of a fixed formula. They vary from market to market. A $75 gap may be appropriate for a project with a 50:50 mix of units in one market, and it may be very inappropriate for the same development in another market. Careful market area research is required to determine the correct rental gap. To gather the information to determine the appropriate gap, the only accurate method uses a 100% field survey of market area projects. Only by plotting the absorption performance of other units in the market can one determine the value consumers place on different unit types. The Danter Company performs a 100% field survey of every market we analyze for just that reason. One objective is to establish a Standard of Gap (SOG) for each market area. SOG represents the normal gap for that market area, along with the ratio that best suits that gap. If field analysis determines, for example, that a particular market area is best able to support a oneto two-bedroom ratio of 40:60 with a gap of $75, then our project directors can use this information in their final mix and rent recommendations before the development is built. The 100% field survey is conducted within a defined Effective Market Area (EMA). 5

6 News and Notes n In case you missed the article by Kenneth Danter, President of The Danter Company, in the July issue of Mortgage Banking, give us a call and we will be happy to send you a copy. Issues addressed include interpreting rent and vacancy surveys and trended versus untrended rents. n The Danter Company is pleased to announce The Danter Apartment Rent and Vacancy Series. Call us at to find out for which cities the report is available. n Don t forget that The Danter Company is more than the best source of information on apartments. We are a full-service real estate firm that also studies condominium, single-family, golf course, motel/hotel, retail, office, industrial, congregate care/ assisted-living, nursing home, resort, marina, and mobile/ manufactured home development. Call us to find out how we can meet all of your real estate research needs. n We would like to welcome members of the National Housing and Rehabilitation Association. As an official analyst for the organization, The Danter Company provides this newsletter without charge to all association members. n Kenneth Danter, President of the Danter Company and nationallyrecognized expert on real estate development and trends, is available for speaking engagements. He has addressed numerous regional and national associations and conferences and local apartment associations throughout the country on issues of importance to multifamily professionals. n In case you missed it, Apartment Lending After the Boom is now available in reprint. Written by Kenneth Danter especially for Mortgage Banking, this article details survival strategies for the nineties that no multifamily professional should be without. Call, write, or fax us today to get your copy. n The Danter Company has moved. Our new address is 30 Spruce Street, Columbus, OH Our phone and fax numbers remain the same: (614) (phone) and (614) (fax). Apartment Reources is published monthly by The Danter Company--30 Spruce Street, Columbus, Ohio Kenneth Danter, President and Publisher, Greg Grant, Editor. Phone: (614) ; FAX (614) Second-class postage paid at Columbus, Ohio. Send all address changes to 30 Spruce Street. Additional copies and back issues may be obtained by by writing to the above address. Reproduction in whole or in part prohibited without written authorization by The Danter Company 30 SPRUCE STREET COLUMBUS, OHIO BULK RATE US POSTAGE PAID COLUMBUS, OH PERMIT NO. 2836