New Leases versus Renewals: What matters more?

[Ashley Wilson]

Whenever I hear anyone talk about managing occupancy, there is always a heavy focus on leasing. Marketing, virtual leasing, ai bots, and screening are just a few popular topics. While leasing is the front door to maintaining a property’s occupancy, renewing tenants is the back door. In other words, you may be great at leasing, but if you can’t keep your tenants your occupancy will forever be a revolving door.

It may surprise you, but we have always operated under the premise that renewals make us more money than new leases. Why? Simply put the risk of a non-renewal costs more. Don’t believe me? Let’s look at the math.

Pre-Covid, the National Apartment Association (NAA) released data showing that the average renewal costs between $5,000-$10,000 per unit. If you are like me, you are shocked and in disbelief that figure is accurate. However, it adds up quickly if you analyze the cost of turning the unit, marketing, vacancy loss, and your team's time to find a new tenant. And remember, this is Pre-Covid dollars too!

Looking at this mathematically, if you assume a 50% non-renewal rate (industry standard) and use the low end of the range of $5,000 per non-renewal, there is a loss of $50,000 per year on a 20 unit property. Further, assuming a 5 cap market, that would be a loss in evaluation of $1,000,000 ($5,000 x 10 non-renewing units for the year / .05 (cap rate)). Alternatively, you would need to drop your rents by $500 or more to have the same impact on your cashflow and your value.

Now that you know this little secret (that most don’t), you can make informed decisions when it comes to increasing rents for new leases and renewals. As raising rents often comes with an increased vacancy exposure risk with renewals, it may not always be the best strategy. We can all agree rising operating costs dictate revenue needs to offset expenses. However, if you minimize your vacancy exposure, you may find (just like I have witnessed for years) that it is a much easier and more beneficial strategy. Note, this is not a longterm strategy. We typically alter our strategy seasonally, as demand shifts with the seasons. This allows us to participate in both pushing rents while also limiting vacancy exposure.