At a time where class-A apartment buildings are popping up all over the US, Tzadik Management’s Adam Marcus Hendry urges potential investors to stay away. A closer look into the class-A market shows the bleaker side of all the recent development. “Recent market studies done in primary markets, including areas like Miami and Fort Lauderdale, are showing a tremendous amount of rental concessions, particularly in the newer buildings,” said Hendry. “It’s almost required now that you give away at minimum two month’s rent in addition to the waiving of most move-in costs.”
These rental concessions, used in attempts to quickly occupy apartment homes, allow for the property to lease their apartments at rents not ordinarily attainable in the given market. In some cases, apartments are giving up to 4 months’ rent-free for all new move-ins, effectively turning a $2,000/m apartment into less than $1500/m apartment.
Adam Marcus Hendry believes these concessions are necessary due to the surplus of availability in many primary markets like Miami and Fort Lauderdale. Despite overall population growth in those markets, the surge of development has far exceeded the demand, according to Hendry. “Property management companies are essentially revenue cuffed. It’s almost necessary if the building next door won’t make you pay for several months,” Hendry continued.
So why not just lower the rent instead of giving it away? “These burgeoning rental concessions are done to keep their market rents and NOI high. These “one-time” concessions are put below the line and seen as one-time instances when there is little evidence to suggest they are” said Adam Marcus Hendry. “The profitability of these apartments is now almost completely on life support, only surviving from the dropping interest rates that reduce debt service at the refinance. With all these new buildings popping up, what is stopping the renter from hopping to the next lease up?”.
The answer would be employee culture, engagement, and keeping “A” players on site for years, thus not having to have new faces in the office regularly, according to Adam Marcus Hendry, but he remains skeptical due to the increasing occurrence of renewal concessions. “Our research is showing some pretty substantial renewal concessions at many class-A sites,” said Hendry. “Renewal concessions aren’t new and are typically necessary depending on the situation, but if the renter was given the same or even double the concession at move-in, your NOI becomes a farce. The only defense we have seen that works is to spend the year developing relationships with the residents, so when the renewal comes up, they will stay for a much smaller concession even in the face of many months offered at nearby places.”
All these varying factors are a big reason for Tzadik Management’s recent push to the upper Midwest. “When looking for an opportunity, we closely examine not just population growth, but overall supply,” said Hendry. “Our recent acquisitions in the Midwest allow us to trust our forecasting and projections, mainly because there are less dangerous variables that currently plague the primary markets.”