As apartment rents rise, landlords turn to software to set prices
As apartment rents rise, landlords turn to software to set prices
Rents are rising at the Vista del Plaza apartments as management upgrades the 60-unit complex just west of the Brea Mall.
But even with rents ranging from $ 1,450 to to $ 2,300 a month, the complex remains full. There are two likely reasons tenants are sticking around.
First, their $ 50- to $ 100-a-month rent hikes come with upgrades such as in-unit washers and dryers, granite countertops and new floors and windows.
Second, renters don’t have a lot of options. With Orange County’s vacancy rate hovering around 5 percent, apartments are nearly full almost everywhere.
Irvine-based real estate analyst Green Street Advisors issued a report Tuesday showing the 2015 outlook to be extremely rosy for Orange County landlords, with rental income projected to rise 5.7 percent this year over last.
That’s on top of the 5 percent income jump local landlords had in 2014, driven by rising employment and more people moving out of roommate’s or parents’ homes and getting apartments of their own.
Although developers are boosting the number of apartments, construction isn’t keeping up with demand.
“Southern California is starting to pick up, with Orange County being the strongest (local market),” said Conor Wagner, a senior associate in Green Street’s research department.
But if landlords are seeing better returns, tenants are crying uncle.
Surveys by apartment tracker RealFacts show the average asking rent for a vacant, big-complex apartment has risen steadily for four straight years, climbing 21 percent, or $ 305 a month.
The Consumer Price Index shows rent for all types of housing rising steadily for 41/2 years, increasing 11 percent in Los Angeles, Orange and Riverside counties.
“I’d like to know why rents keep going up,” said Frances Schroer, 86, a Santa Ana mobile home resident whose monthly income barely covers her rent and bills.
“I don’t think it’s fair for people who live in apartments or mobile homes. A lot of people are struggling, just like me,” Schroer said. “I’m sure a lot of landlords are greedy.”
Rise of the machines
Indeed, some landlords are greedy, boosting rents while skimping on maintenance, conceded Vista del Plaza’s Tim Gorman, who manages his family’s business, WR Gorman and Associates.
But local landlords and property managers note the alchemy behind Orange County’s rent hikes usually is far less arbitrary and far more complex than people think.
Supply and demand remain key drivers behind the ups and downs of rentals.
Scott Morrison, a senior vice president for apartment developer and manager Legacy Partners Residential Inc. of Irvine, said landlords are checking Craigslist as much as apartment hunters. They’re also relying on market survey data, which help them justify rent hikes to new and renewing tenants.
Increasingly, landlords are turning to the same type of software that airlines and hotels use to set prices.
As with the price of an airline ticket or hotel room, lease rates for a single unit can change daily depending on factors such as market rates, vacancies, the number of units coming on the market and tenants’ planned move-in and move-out dates.
“It takes the emotion out of setting rents,” Morrison said. “We’re getting 3 percent more because of this product.”
Two companies, RealPage Inc. and The Rainmaker Group, have been offering “revenue management” or “dynamic pricing,” as the software is called, for just over 10 years.
Although their clients tend to be large apartment owners, real estate trusts and other institutional investors, more smaller landlords are starting to use these products, said Keith Dunkin of RealPage in Texas.
Dunkin said about 35 percent of landlords with 50 or more units are using revenue management software. And it’s used by all of the publicly traded apartment real estate investment trusts.
“It’s not just about raising rents. It’s about revenue, the balancing of rental rates and occupancy,” Dunkin said.
Landlords make more money by keeping their buildings full, so lower rents sometimes can be the best solution by guaranteeing higher occupancy.
For example, Dunkin said, a tenant may be offered a six-month lease for $ 2,000 a month. But that same unit will be available at $ 1,750 a month if the tenant signs an eight-month lease, ending when the landlord will have an easier time rerenting it.
In Southern California, rents can be lower for leases expiring in the summer, when more people move, and higher for leases expiring between Thanksgiving and New Year’s Day, when fewer people change addresses, Morrison said.
Still some landlords prefer to save money on software subscription fees and monitor the market on their own.
“For us, each building is personal,” said Gorman of Vista del Plaza. “We have to be able to look our people in the eye and say, ‘This is why you’re getting a rent increase.’”
But Allen Dauger of A&M Properties, which owns and operates 1,300 units in 10 Orange County properties, said he switched to revenue management a year ago because it was difficult to keep up with changes in the market.
“It’s not arbitrary,” Dauger said. “It looks into demand and supply. All of those things go into computing what the rent should be.”
Landlords are like any other investors, noted Nick Lieberman, past president of the Apartment Association of Orange County. They want to maximize their returns.
But rents need to go up just to keep up with a landlord’s escalating expenses. Taxes, utilities, wages and maintenance also are on the rise, property managers said. If rents don’t increase, the landlord’s income drops.
Publicly traded real estate trusts and fee-based property managers have an incentive to get the highest rents possible to boost income to shareholders and to their clients.
Rising rents also generated higher prices in apartment building sales. That, in turn, pushed “capitalization rates” – or the expected return on an owner’s investment – to 4.7 percent to 4.9 percent, according to reports by CoStar Group and Green Street Advisors.
Hence, transactions also can produce additional rent hikes, said Michael LaCour-Little, a Cal State Fullerton real estate professor. For example, a sale triggers a property tax jump to market rates after remaining artificially low under Proposition 13.
New owners “are going to want to recoup those kinds of costs,” LaCour-Little said. “And if they make capital improvements, they’re going to want to see a return on their investment.”
Still, strategies differ, depending on the owner and the owner’s goals.
Landlords looking to sell a building might boost rent because that tends to increase the sale price.
Smaller landlords tend to keep rent hikes below market rates for renewing tenants to avoid turnover costs. Bigger landlords might be more aggressive because tenants want to avoid the hassle of moving.
Vista del Plaza renter Behnaz Hudson, 51, believes it’s reasonable to pay periodic rent hikes. She has had two increases – from $ 25 to $ 55 a month – in the five years since she moved in.
“The cost of living goes up. Why not rent?” she said.
Gorman, Vista del Plaza’s manager, said rent hikes make it possible to finance upgrades that are needed to keep the building up to date and competitive.
His family keeps rent at market rates while providing more amenities than you find in similar units.
“There’s value to the long-term tenant,” he said. “(But) if we didn’t take rental increases, we couldn’t make improvements, and 10 to 12 years from now, we would have an under-improved building.”
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