Friday, November 14, 2008

Where do your tenants come from in a recession and where are they going ?

Morgan Walsh - Multi-Family Specialist
Posted by: Morgan Walsh
Multi-Family Specialist
775 336 4646

Morgan Walsh is a commercial broker with 20 years experience in investment sales, multifamily and specialty sales, representing buyers and sellers, institutional and private developers in market rate apartment sales, mixed-use residential development and the development of affordable housing projects.

Apartment managers are reporting a curious phenomenon in the rental market—the borrowers in foreclosed property are not showing up to lease an apartment. One conjecture is that such tenants would prefer a single-family residence and they can still find housing in the rental shadow market. Others are leaving the area entirely to house with family members, especially if job loss led to the foreclosure. An apartment owner might not want to target a marketing effort to capture this business, but in a recession the tenant who can pay and has solid employment could be a good bet if the price is right. Data for defaulting borrowers by residential address is widely available and can be sorted for neighborhoods near the apartment complex. Defaulting homeowners could show up later in the cycle when the shadow market for single family dwellings is nearly absorbed, but that’s months off.

Astute managers are being very pro-active with tenants who deliver notices to vacate. First, they qualify the tenant with questions to identify whether the motivation is financial and the cause of the problem. Then they engage the tenant in negotiation. Can the tenant trade down within the complex to a smaller unit ? Can the tenant move in with a friend in the complex ? Can the rent be adjusted to keep the tenant through the winter season ? Owners really appreciate this skill because it maintains occupancy with tenants who have a track record of payment and performance. Transfers within the complex conserve occupancy and build incredible goodwill among tenants.

Owners can do several things to keep pulse on the turnover in their buildings. Managers could be instructed to categorically track where tenants reside as applicants and to ask their motivation for the move. Tenants on notice can be asked to complete a simple questionnaire to track why the tenant is vacating, pertinent attitudes toward management and facilities and what kind of housing the tenant is relocating into. A polite expression of concern for vacating tenant can lead to a discussion about staying in the building if that can be done. Why not make this part of the traffic and showings report ?

Unfortunately, skip-outs are way up and that leaves ownership in the lurch if they compromised receipt of a full security deposit as a move-in special. Frequently, the manager has lost valuable time in recovering possession and lease-up when the unit is abandoned without notice. This may be a time to qualify tenants even more carefully, not relax standards across the board. No tenant is always preferable to the bad tenant, but vacancy management is the watchword this winter.

What are you seeing at the street level now ? What have you done to slow down the vacancy ? We look forward to your comments and impressions.

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