Back for another round of apartment budget discussions. Today we are talking about vacancy loss. Before we do, lets recap in the way of a list of line items we have penned about up to now.
Gross Potential Rent
Total Potential Rent
Loss to Lease
Loss to Lease – Move – Ins
Loss to Lease – Renewals
Total Effective Rent
Let me introduce you to the biggest robber of revenue on the income side of the ledger – vacancy loss. It gets disguised under a number of line items, all seeming innocent in nature. Things like Down Units, Models, Offices and Fitness Centers (if housed in an apartment) get captured in Vacancy Loss. The line item as a total (Total Vacancy Loss) captures 100% of all physically vacant apartments in the way of a negative revenue number no matter the nature. And, it is driven by any number of stimulants.
Apartment Vacancy Drivers
Vacancy is driven by the economy as much as it is by poor or sub par management. If the economy is stalled or sputtering along than vacancy tends to trend higher. If it is booming – think dot-com days – than vacancy is low. If job growth is anemic or trending net negative then vacancy trends higher. If jobs are growing on trees – the vacancy trends lower. If interest rates are low and lending standards are relaxed then vacancy suffers in the hands of home buyers. Interest rates rise and lending standard constrict then vacancy goes lower. Developers and builders take advantage of foreseen demographic trends, low-interest rates and relaxed construction lending standards to build tens of thousands new units and vacancy could suffer to the down side. They stall out for any reason and the inflow of new renters (demand) takes off and you yield to the upside.
Down units are a Big No in my book. To easy to lose track of. Put an apartment on a down unit status and the next thing you know you are spending 10k to get it back on-line. It gets cannibalized by the service team and left to rot by the management team. Just don’t do it. If it’s considered down – call it a tough turn. And, by all means do not let your service team pick it for parts and pieces.
Likely the biggest contributor to vacancy loss is bad management. From curb to commode, you can add to or take away from the loss to vacancy. From pricing to inventory turn time and ticket turn rates, you can give to or give back vacancy loss. And, from sales to renewal discussions – you can reap or spoil the line item.
Drawing it in
In summary, vacancy loss can wreck a budget inside of one months time. It can also boost your bottom line by many fold if managed well. It’s driven by any number of factors from macro to micro and everything in between. It can be a friend or an enemy.
What are your thoughts – would love to see them in the feedback section below. And, thank you in advance.
Your – fending off vacancy loss – multifamily maniac,