When occupancy rates are high, risk to rental income may not sit as top-of-mind for property owners. In times of economic uncertainty, however, it’s easy to overlook the fundamentals of optimizing expenses, and that can lead to economic occupancy concerns.
Market downturns, delinquency and damages, legislative landscape, and other economic stressors all play roles—potentially negative ones—for properties. Recognizing the potential risks and subsequently implementing a better loss protection plan helps prevent your properties from losing revenue.
To protect economic occupancy, owners and operators need to strike a healthy balance between conventional approaches that drive short-term leasing results and modern strategies that grow long-term financial health:
Oftentimes, operators focus on incentivizing quick move-ins by offering concessions (e.g., deposit-free move-ins) to boost physical occupancy in the short term. In fact, 60% of property-level respondents in our Apartment Visionaries survey reported that offering free incentives improved the likelihood of lease signing the most.
However, when we asked corporate leadership, 69% cited free incentives as hurting economic occupancy more than any other concession. This is because concessions leave operators with dangerously little protection in the event the resident doesn’t pay rent or leaves significant damage. What good is it to fill units with residents who may not pay rent?
Liabilities down the line cause owners and operators to lose out on the anticipated revenue of long term leases that the leasing incentive was intended to generate. In other words, properties generate less income and economic occupancy rate drops.
Key Consideration: Lease concessions wipe out move-out protections for move-in expediency where outstanding accounts often create undesirable recovery administration and bad debt piles up.
Certain renters are chronically late or are more likely to move-out leaving excessive damage behind. When rent is late or damages are beyond normal wear-and-tear, cash flow becomes an issue. In addition, accounting and administration headaches mount, mortgages become harder to pay, and community reputation suffers.
1 in 5 renters say they’re likely to miss a payment and 65% of surveyed operators reported that damage costs exceeded the security deposit amount. Whether due to damages, evictions, or skips, properties are at a high risk for major rent loss and asset value margin erosion—especially when they have weak guardrails in place.
On one hand, it’s important to identify habitually late-paying renters and those with higher damage risk, but properties should also ensure they have adequate protection in place. With security deposits, operators need to recognize the intrinsic risks. Likewise, operators should understand the drawbacks of deposit alternatives.
Key Consideration: Between security deposits and deposit alternatives, both forms of ‘protection’ can actually leave properties less likely to recover rent loss and damages and more likely to write off high final account balances as “bad debt.”
Data-driven prediction technologies exist in various industries, and multifamily is no exception. Rent pricing is no longer set arbitrarily, so why would we continue setting loss protection that way?
With all the risks associated with property management, owners and operators must re-think the current risk mitigation landscape and ditch outdated, ineffective financial instruments (like security deposits) for modern, data-driven loss protection. Doing so will allow properties to better anticipate and protect against risk, thus generating gains in NOI, asset value, and operational efficiency.
Key Consideration: Just as revenue management software has revolutionized the rental income side of the equation, risk prediction software is optimizing the loss side of the equation so that operators can predict risk and absorb more of the outstanding balances lost after move-out.
Asset value margins are under pressure and rent growth is at risk, meaning it’s ever more important to protect economic occupancy. If creating additional value to offset loss is a priority, operators need to carefully consider the consequences of overlooking common problem areas that have a direct impact on economic occupancy: lease concessions, rent loss and damages, and crude risk mitigation tools.
We can’t control economic uncertainty, but a balanced approach when it comes to high-risk leasing strategies and smarter loss management puts owners and operators in a stronger position to protect economic occupancy.
As many owners and operators optimize their budgets for the upcoming year, it’s critical to have a future-proof budgeting strategy that outsmarts uncertainty and drives asset value—download the guide to building better budgets.