By: Francis Yuen
While it may be a popular belief that rising rents and low interest rates have chased tenants away from institutional apartments and into more affordable rental alternatives or homeownership, the data shows this to be more myth than reality, at least for now.
Along with vacancy, turnover is another way to analyze current market conditions. If a tenant leaves on the first of the month and the apartment is filled 25 days later, the month-end vacancy rate does not change. However, turnover will capture this move-out-indicating that the initial renter may now be at a competing property or has become a homeowner.
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For our analysis, we looked at tenant turnover in eight of the largest apartment REITs. As is seen in Exhibit 1, year-over-year same-store tenant turnover for the eight REITs actually fell in two of the last three quarters.(1)
This isn’t to say that the rents and interest rates haven’t played a role in tenant turnover; rather, the greatest impact has already been felt or has been overstated. REITs aggressively pushed rents in 2011 as they focused more on rents and revenues than on maintaining occupancy.
In fact, many REITs wanted more tenant churn in order to maximize rent growth, and the result was a nearly 2% rise in year-over-year turnover. As rent growth slowed in 2012, the story du jour was that tenants were leaving the renter pool in favor of homeownership at historically low mortgage rates.
And while it is true that some REITs reported that an increasing number of renters cited homeownership as their reason for leaving, the aggregate total of these renters-turned-homebuyers hasn’t been large enough to grow the turnover numbers.
Instead, it would appear that existing institutional renters are accepting elevated rent levels as the new normal and/or haven’t found a better alternative … yet.
As another September approaches and more new construction hits the market, REITs’ revenue maximization products will have to adjust their dials to deal with the new competition. And if they are to maintain the current turnover rate, rents will likely have to fall.
(1) Average turnover calculated by weighting total inventory of each REIT.
Francis Yuen is a senior real estate economist with CoStar Group
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