By Gavan James, Oakwood Worldwide
The raw material of the third party corporate housing industry is the stock of apartments you have to rent to your customers. Like any industry controlling material cost, we all must keep a sharp eye on the amount of apartments we rent, and the price we pay for them.
For many of us, the largest variable of the business is the vacant apartment costs. High vacancy can destroy your financial statements when the margins you charge above the raw cost of rent, furniture and other related costs are often only 15% – 30% of your rate structure. One unrented apartment can eat the net profit of ten apartments for some operators.
The following are a series of tips related to several of the main segments where vacancy occurs in a lease cycle. Many tips will be second nature, and hopefully, you will find a useful nugget or two.
Unrented Apartments Between Guests
- Understand your demand factors such as seasonal changes, client rental trends, internet rental trends, and other factors that impact demand. Find a method to track year over year trends, and deploy trend reports that factor in history, and current channel trends.
- Be prepared to adjust stock when trends show an increase or decrease in demand. Diversified stock of leases in any geographic area is key. Long term leases that allow for the largest margins are important to drive revenue, and as long as lease expirations are spread out, you are often able to avoid lease vacancy exposure. Having your stock balanced with six month leases taken out in the first and second quarters allows lease returns in the third and fourth quarters. Finally, renting short term leases and wholesaling from other providers is often an area that allows low vacancy, yet can accommodate high season occupancy peaks.
- Effectively find apartment communities with flexible lease term arrangements, including win/win lease break clauses.
- On the rental side of the equation, short term rentals, where allowed by law, are an effective way to mitigate vacancy between guests and the other vacancy areas noted below.
- Offer your un-rented apartments up for wholesaling to other corporate housing providers. While your margins may be slimmer due to offering competitive rates, mitigating vacancy is usually worth the accommodation.
- We can always rent our units to the unfurnished rental market if we can not find a paying client. We occasionally do this when committing to an important client and are forced to take leases in a remote area with limited corporate apartment rental options.
- Trade unit type leases with an apartment community if you have an oversupply of one bedrooms yet high demand for two bedrooms.
- Careful with your stock on three bedroom apartments. These are notorious for producing high vacancy in many markets as demand is volatile.
Controlling Vacancy at Lease Inception
The takedown of new apartments allows for seasonal occupancy growth and year over year growth as your business expands. Your operation’s profits can be improved greatly by limiting the days you pay for a new unit before your first paying guest arrives.
Negotiate to have your unit furnished and set up before you take technical occupancy and have your first guest arrive. Many apartment communities often allow up to 10 days or longer for a new resident to move-in and start paying rent. Ask your apartment managers for a favor and use this downtime to set furniture, housewares, and turn on cable, utilities and DSL services.
- If you have excessive vacancy due to a client wanting a specific unit that you must pay rent on that is a new set-up, build the excess cost into their rate.
- Rent short term, where legally appropriate, if the long term rental you were hoping for does not materialize right away.
- Take great effort to schedule your internal teams and furniture, utility and other contractors in a timely manner to lessen vacancy costs. The last thing you want is to delay guests because of controllable factors.
- Have a well defined internal program to understand current guest departures to allow for re-renting opportunities and to understand exactly when an apartment will become vacant. At the same time, study your lease expirations with your properties and return apartments to communities in a timely manner.
Re-rented Apartment Vacancy
Excessive vacancy with re-rented apartments is one of the most controllable areas of vacancy. Understanding the factors that drive this vacancy is key.
Your reservation staff and the decision you make with your internal systems can make or break your vacancy factors. If you have multiple reservationists, study their booking patterns to see if there is opportunity for certain associates to negotiate and suggest arrivals that favor fewer down days.
- Again, in markets where short term rentals are allowed by law, such rentals can mitigate and fill apartments that may have an excessive gap between occupancies.
- Needless to say, clean and reset your units quickly. Inspect apartments either prior to departure or day of departure. This allows timely scheduling of internal resources and contractors.
Unrented Apartments Between Final Guest and Property Lease Termination
This is another area of vacancy that can mount, yet is controllable. Vacancy on this end of the spectrum results from mismatched lease expirations between your clients and the lease expiration of actual property leases, and un-rented periods before you return a property lease.
A terrible waste of resources is spending rent dollars on the period between final guest departure and the property lease expiration. One way to avoid this expense is to negotiate a match between guest departure and property lease expiration. Some apartment communities will allow this, as long as you do this in the month past the standard lease expiration, not the days before the property lease expiration.
- Avoid apartment communities with 60 day lease expiration notice requirements and favor ones with 30 day notice requirements. Some markets such as Seattle are moving to a 60 day custom, however, this can be negotiated.
- Once again, short term rentals are a great way to have paying guests occupy the period until the final lease expiration.
- Clean and pick up furniture quickly at the end of a property lease. It is better to negotiate to do this when you have stopped paying rent and have technically returned the apartment.
As much as we need to control wasted resources spent on vacant apartments, we find it important to maintain a good stock of apartments where customers demand them. This does involve the risk on maintaining stock. Hopefully, the above basic techniques provide a framework to operate, and not lose too much sleep counting vacant apartments instead of sheep at night.