This article is being republished for Alicia and Derek.
Special Note to Alicia and Derek: When you have no availability in your one-bedroom apartments, it's time to increase the rents. One of the biggest issues I see with apartment communities across the country is that they treat community occupancy as a whole when they should be focused on apartment-type occupancy and availability. Rents on a one-bedroom can be higher than on a two-bedroom! I have achieved this with success!
I wrote an article a while ago that addressed the issues of offering concessions. Actually, it was more of a rant, but you can believe that I meant every single word of it. The truth is that at the time, I was face to face with a tough decision to toss my convictions aside and offer concessions at McNeil House (the first apartment community I built, 193 units in Austin Texas), or continue receiving only three or four new leases per week, while around twenty new apartments per week were completing construction and ready to lease!
Anyone who knows me, including our long-time subscribers, can attest that “concessions” is practically an expletive in my vocabulary. Choosing whether or not to offer them in my very own community was probably the toughest decision I’ve had to make as a developer – well, the second toughest. The toughest was whether or not to build in the first place!
The fact that I had to approach the issue from all angles, or even approach the issue at all instead of dismissing it without a second thought, opened my eyes a quite bit to the many factors involved. Now, don’t get me wrong – I’m still up on my same old soapbox. Concessions are NOT the answer to your occupancy problems. The whole reason why companies and communities offer concessions or incentives is to gain a competitive advantage, right? So, let me ask you this… if everyone in the market is offering concessions, then where’s the advantage? It only puts us all right back where we started, on a level playing field. We all end up giving away the farm rather than educating our prospects and residents, and playing the never-ending game of one-upsmanship that some of us have been trapped in since time immemorial. Concessions are one of those things that works well in theory, but actually creates a world of, well, concessions (I was going to use a four-letter word there, but the one I used is worse).
Hey, I understand that there’s something to be said for a level playing field, but remember when Mom used to ask, “If all of your friends jumped off of a cliff, would you do it too?” Mom was giving you some amazingly valuable marketing advice there, and you didn’t even know it. My experience with McNeil House has given me a much clearer understanding of the facts that have to be carefully considered where the concessions issue is concerned. If you find yourself in a similar situation, I hope you’ll take the time to consider these factors with an eye for the “big picture”. I had to think, and rethink the issue before making my final decision, and I’ll let you in on all the factors that I considered and the steps that I took to sensibly approach the issue of offering concessions. Next, we’ll discuss my final decision, and the results we received. We’ll answer the important questions: Would I do it all over again? What would I change? What did Lori (the community manager) have to say?
If your community occupancy falls below a profitable level, or you find yourself with more supply than demand, perhaps this common-sense approach will help you as much as it helped me!
Review The Overall Picture
- Meet with the entire staff, and ask for feedback from everyone on what they feel is happening. (Actually, you should do this regularly anyway, whether you perceive a problem or not. Some of the best and most practical insight comes from your “front line”.)
- Have your entire staff shopped along with your top three competitors. Use a third party independent company so that you’ll be able to compare the whole apartment shopping experience from your prospects’ perspective, and make adjustments if needed.
- Meet with the staff again. Review the shopping reports together, make the necessary adjustments, and arrange for one-on-one training where it’s needed.
- Review each floor plan independently, and consider its pricing carefully. Make any necessary adjustments to the rent based upon the floor plan’s strengths, weaknesses, and competition within the marketplace (compare your floor plans to your competitors’ similar floor plans and pricing). In other words you need to do a side-by-side, floor plan-by-floor plan comparison of your community versus your competitors’ floor plans. Jennifer Nevitt Casey of Bravo Strategic Marketing has created a comprehensive and widely used method for doing exactly this. Jennifer shared her system for comparatively rating floor plans. Jennifer and I also worked together to create the ultimate evaluation tool! NOTE: Alicia and Derek Read The Finer Points of Floor plans I am tracking this down so I can post it for you both.
- Walk all of your floor plans with a critical eye for weaknesses. Create a training list with tips and techniques for overcoming objections and selling the strengths of each floor plan as compared to the competition.
- In existing communities, I would also take the “less desirable” locations and floor plans and determine if there is anything within budget that we could do to improve the interiors. I’ve used this technique repeatedly with great success.
- Create / evaluate the model. We completely upgraded our model with added crown molding, optional paint color, special plumbing fixtures, special lighting fixtures and ceiling fans, closet organizers etc. In other words, we dressed the model up with all of the added options that were available for our residents to choose from. This showed our prospects what they could do with the apartment home if they chose to. We priced each option by adding only a 15% mark-up to our cost. Five percent of the mark-up is given to the leasing professional who sells the upgrade, and the additional 10% is administrative income. We call this our “Custom Home Apartment™. Several companies, including ZOM Residential and Post Properties have used similar custom upgrade programs with success.
- Photograph the entry of your community and your competitors’, and compare them. Make yours more inviting. Look at your advertising. How does it stack up against your competitors? Do you sound different? What do you offer that they don’t? KEY: Are you advertising the floor plan with the highest availability? Are you showing both photos of your community, model and lifestyle photos, or are you showing the same thing as the competition?
- Have you tried offering an incentive (i.e. a washer/dryer, ceiling fan, upgraded fixtures, crown molding and so on). The best incentives are stay with the community long after the resident is gone, and create added value in the long run.
Determine if you have a leasing problem or a marketing /advertising problem.
Don’t let the formulas scare you. Once you’ve filled in the blanks, you’ll find the process to be fairly straightforward:
Objective: To reach your leasing objectives, they must be qualified in terms of numbers, time to lease up, and people. Complete the information below to determine your objective. Remember to be realistic.
Leasing Objectives
Number of occupied apartments desired (ex: .97 x NO. Units) __________________
Number of apartments currently occupied -_______________
Pre-leased (vacants and on-notice) -_________________
Subtotal additional apartments needed =_______________
Estimate Skips +_______________
Current Notices +_______________
Estimated Canceled preleased apartments -_______________
Lease expirations +_______________
Lease renewals expected (include residents going month to month) -_________________
Subtotal number of new leases needed =_______________
Estimated canceled and rejected leases +_______________
Net Total Number New Leases Needed =_______________
Traffic Needed to Reach Objectives
Leases needed ¸ closing ratio = traffic needed to reach new lease goal.
____________________ ¸ ___________________ = ____________________
* Average closing ratio including unqualified and cancels
Note: By increasing the closing ratio, you will be able to decrease the amount of traffic necessary to meet the objectives. This greatly saves your marketing / advertising dollars.
Rentals Per Leasing Professional Number of new leases needed per month ________________
Number of leasing professionals ¸________________
Number of new leases needed per month,
per leasing professional =_______________
Leases needed per week (¸ 4.3) =_______________
Telephone To Traffic Ratio
Total appointments kept ¸ total phone calls = Telephone to Traffic Ratio
____________________ ¸ ___________________ = ____________________
* Goal = more than 60% of all appointments kept
* Goal = 25 -50% of closing ratio
Cost Per Traffic & Cost Per Lease
A. Monthly or weekly cost of a specific media or traffic source ¸ traffic generated by _____
this source = cost per traffic
$______________ ¸ ____________ = $ ____________ Cost Per Traffic
Monthly or weekly cost of specific media or traffic source ¸ total new leases
generated by this source = cost per lease
$______________ ¸ ____________ = $ ____________ Cost Per Lease
B. TOTAL of all Traffic Sources expenditures ¸ total traffic = average cost per traffic
$_____________ ¸ ____________ = $ ____________ Average Cost Per Traffic
TOTAL Traffic Sources expenditures ¸ total new leases = average cost per lease
$_____________ ¸ ____________ = $ ____________ Average Cost Per Lease
Do you need to increase traffic?
- Pull your last two weeks worth of guest cards, and call each and every one. Tell the prospect that you’re conducting a third-party audit of the apartment shopping experience, and need to ask them three quick questions. Promise that you won’t take more than a couple of minutes of their time. The questions we ask are:1. Have you made a decision on where you are going to move, and if so, why did you select that community? (If they say that they’ve chosen your community, community, thank them, set an appointment for the signing of their lease if needed, and move on to the next person.) 2. Did you visit _________ apartments (your primary competitor), and if so what did you think about the community? Is there a specific reason why you’ve decided not to lease there?
- Invite local businesses to attend resident functions. This increases your word-of-mouth referral network by leaps and bounds.
- Beef up your resident referral program. If you have a referral program in place, sometimes all it takes is a well-designed flyer to remind residents of it. If your program has grown stale, give it a fresh twist. If you don’t have a referral program in place, get busy! (If you’re considering offering cash rewards, make sure they’re legal in your area, but please consider that there are plenty of great alternatives to cash or rental rate rewards!)
- Make marketing calls. I highly recommend that you not only call on the Human Resource Departments of local employers, but that you also take time to introduce yourself to the receptionist. She knows everyone in the office and everyone communicates with her on a daily basis. And these are usually the people that everyone turns to for information when they’re new to the company. Establish a long-term program that keeps you in touch with these valuable people. Once a month, deliver donuts, cookies, candy, flowers or some other small gift to the receptionist that she/he may share with the rest of the employees. Include a friendly note with a few business cards enclosed for them to pass along.
Increase Closing Ratios!
- Provide continuous motivation for Leasing Professionals to stay focused on the goal (i.e. charts, graphs and incentives placed where all can see).Extend office hours and raise bonus amounts for leases closed during a specific timeframe.
- Establish a rotating bonus plan based upon leasing certain apartment types. For example, “All A-1’s leased this week are bonused at $100!” I typically select the apartments that have either been vacant the longest or have the highest availability. Establish team goals with bonus incentives. Any opportunity to foster teamwork is too valuable to pass up!
- Bring in your company’s very best leasing professionals to obtain their perspective. Have everyone shopped, and review the shopping reports carefully to apply training where needed.
- Provide weekly articles of interest that focus on overcoming concession objections and closing. I faxed our community a new article every Monday morning. Keep the tone encouraging and motivational.
- Ask yourself this: If you increased the closing ratio by ___%, how much more traffic would you need to reach the desired goal? Is this possible? Can you generate that much traffic? Can you handle that much traffic? Here’s my “Feasibility” worksheet:
Traffic Increase Feasibility
Is the number of leases needed per month significantly higher than current performance?
How much more would traffic have to be increased if closing ratios remained the same to equal the needed goals?
Needed leases goal. Current closing ratio _____ = _____ new amount of traffic needed less current amount of traffic _____ = _____ amount of extra traffic needed. Is this possible?__
How much more would closing ratios have to increase if traffic remained the same to equal the _____ needed leases goal?____________________________________________
Needed leases goal _______ ¸ current traffic _______ = new closing ratio needed _____. Is this possible?___________________________________________________________
What is the monthly goal per leasing professional?__________________________
How does this compare with current performance levels?_____________________
___ __________________________________________________________________
__ __________________________________________________________________
__ __________________________________________________________________
Ask yourself the big question.
Finally, when all is said and done, ask yourself whether it’s really necessary to give away such a valuable commodity as the opportunity to live in your community, not to mention cutting profit from your bottom line! In light of all of the other things that you can do to increase traffic, better motivate your staff, and gain a profitable long-term advantage, should you really give in?
My answer was a resounding (brace yourself), “Yes!” As sick as it made me, I made the decision to give concessions. I actually get chills as I sit here and write this. Can you guess what happened next? As a result of my decision to first consider all of the above, and then give in to concessions, leases increased -- by leaps and bounds! The on-site staff is more aware of the competition, more motivated, and more skilled at closing than ever before!
The decision to give away rent took me five to seven months to make. What if I had to do it all over again? I’d follow all the same steps that I took, but I’d do it faster. I should have made the decision to offer concessions about two months earlier than I did, based on my lease-up schedule.
What else have I learned?
- We could never have truly known whether or not we could have leased-up without concessions if we didn’t try to avoid them in the first place;
- The staff became a powerhouse of product knowledge! They were more educated than ever before about our product and our competition;
- Our competitors thought that we were crazy (actually, they thought that I was crazy, and pitied my staff), so we were easily dismissed as viable competition. Now, because we tried it the hard way first, they realize that we’re a force to be reckoned with. They knew that we don’t offer concessions as standard practice, and that when we do, they’d better jump!
- If you have to give something away, ask for something in return. Along with the free rent, we asked the resident to sign a paying lease term of either six months or one year. In other words, their free rent period, although covered under the lease, was not included when the lease term was calculated. For example: with one month free rent, the lease term was 13 months. This enabled us to get full years collection of rent without increasing our operating expenses the next year. If you don’t do this, (as you may be aware), your turnover expenses are divided into 11 months instead of 12, so the concession actually costs you more than a months’ rent. Note: Alica and Derek this is why I asked you to read Lease Renewal Strategies that Help You Manage and pay close attention to staggering leases by apartment types.
- Cover your bases. As even further protection, we asked the resident to sign a concession agreement, stating that if their lease is broken for any reason, the entire amount of the concession is due and payable. Where the lease terms and conditions are met, there is no liability.
- Sometimes it makes sense to spread the concession over the first six months of the lease. We did not use this method, but I have heard of many companies that have used it with success. I think it’s a great idea, where the market is receptive to it. Because we decided to offer concessions in order to be competitive, we had to also consider that part of our competitive edge involved how and when the concession was delivered. In our case, the market was most receptive to a one-time offer; and you’ll find this to be true in many areas where residents view the concession as a welcome means of offsetting moving expenses – but I think the six month idea is a great one if you can pull it off.
- You really can increase rents even though you are offering concessions. In fact, it’s probably easier to increase rent in some places, where the market is focused on the short-term benefit instead of the long-term effect. This rings especially true when you are offering the better product. An apartment community in Dallas leased 100 plus apartments (70%) in two months by giving away 1.5 months’ rent. Unfortunately, they didn’t increase the rents while doing it, not to mention that they weren’t under the gun because they didn’t even have the apartments out of construction yet. Don’t miss the opportunity to raise rents when offering concessions, whenever you can do so sensibly.
- If you are offering concessions and decreasing your rents at the same time you had better have done all of the above and make absolute certain you are handling each and every unit type and floor plan on a unit by unit basis and monitor it with every single new rental.
After all was said and done…
I know your burning questions are (1) how did the community manager feel about the entire experience, and (2) what kind of concession did we finally settle on.
Lori’s last words were “I have learned a lot!” When asked if she would do it all over again, her response was “People can’t believe that we leased all those first apartments without concessions, but I would give the concessions the next time around instead of waiting until we had vacancy loss”.
As for our decision, we first decided to offer the market standard one-month free on a one-year lease, and 2 weeks on a 6-month lease. We quickly adjusted that to $500 on a 6-month lease and $1000.00 on a one-year lease (which is less than a half a months’ rent and a months’ rent, respectively). We only offered concessions only on floor plans with the highest availability. In addition, and this is key, we continue to adjust our rents upward as we leased apartments (see #7 above). We actually charge more for a one bedroom floor plan then we did for a two bedroom floor plan.
If you’re caught in the concession trap, or even considering giving in to it, please take the time to consider the HOW, WHAT, WHEN, and WHY of it all before you follow your competition over the rail of that proverbial bridge! Depending upon your own unique situation, there is either an economically smart way for you to avoid concessions, or to offer them wisely. I found my answer, and so can you!
Ours is a business of cycles; and believe it or not, the time is going to come again to raise the rent. In case you’ve forgotten what that’s like, let me remind you that just like every great relationship, the one between you and your residents requires a carefully maintained balance of give and take. When they signed the lease, you agreed with them that you’d take a specific amount of money in return for giving them a specific range of features and benefits. Imagine those elements on each side of a scale. It’s important to remember that the rental rate your residents are paying to live in your community is not an insignificant part of your relationship with them … for many, price is the hottest button of all. If you’re going to ask them to put more on their side of the scale, you’d better be prepared to define what you’re putting on your side, too, to keep the balance in place.