Other longer-term options are available to coincide with the short-term fix of rent concessions.

Data from pretty much every source imaginable is screaming that rent growth is slowing. A Zumper National Rent Report notes that rent increases have steadily declined all year. The national median rent for a one bedroom is up only half a percentage point over September 2022­—the smallest increase in more than two years.

When rent growth decelerates, many operators turn to concessions to fill occupancy, with free rent or parking being the most popular options. While occupancy can certainly be alleviated through concessions, it’s typically a short-term fix and usually takes a hit.

“Chasing occupancy at all costs can lead to increased delinquency, bad debt and higher turnover,” said Marty Zietlow, Director of Asset Management for Legacy Wealth Holdings. “In the long run, concessions come at a great cost.”

During flattening rent growth, it begs the question: What’s an operator to do?

Vexed by vacancy

Vacancy can largely be attributed to supply and demand shifts. Many renters took advantage of historically low mortgage interest rates – below 3% – in 2020 and 2021 and purchased a home. But interest rates started skyrocketing, alongside rent increases, inflation and risk of a recession. Many renters decided to stay put, live with roommates or even move in with family. Simultaneously, the new construction boom spiked supply to outpace the demand for apartments, exacerbating vacancy.   

According to the U.S. Census Bureau, vacancy rates are the highest they’ve been in two years, hitting 6.4% in the first quarter of 2023.

“When vacancies rise, operators immediately turn to rent reduction and concessions, but those strategies don’t maximize NOI,” Zietlow said. “The conventional concessions used in the industry – free rent, discounted parking, gift cards upon move-in – aren’t necessarily the best long-term value solutions, and we decided to look at the bigger picture to strategically tackle vacancy challenges.” 

In lieu of conventional concessions, progressive operators are taking a more data-driven approach to rising vacancy by leveraging incentive optimization platforms. These platforms typically offer financial benefits to renters and provide a viable long-term alternative to conventional concessions.

Taking the alternative route

Incentive optimization platforms allow operators to stabilize occupancy with positive NOI impacts and give operators an edge: They curb concession costs, promote positive renter behaviors and increase both leasing velocity and renewal rates.

“We discovered that rent returns were a really practical and effective way to tackle a few different things, from reducing concession costs and increasing renewals to mitigating delinquencies and improving NOI,” said Morgan Snyder, Director of Operational Excellence at Continental Properties. “The data behind incentive optimization paints a very clear picture – one that is beneficial to all stakeholders. It’s been a very valuable alternative to concessions and creates more of the long-term value we were looking for.”

Rather than continuously adjusting rates and providing costly concessions, operators can strategically allocate financial incentives to complement specific apartment homes or leasing seasons for a more sustainable revenue stream. Renters also receive long-term financial benefits and are rewarded for paying rent on time and signing a lease renewal agreement—two factors that improve the overall ecosystems of apartment communities, especially during economic vacancy.

The incentive cycle

Most consumers are already familiar with cash back from credit cards, but rent returns are more of a novel concept in rental housing. Residents see a return on an expense they’re already having to pay each month, which can be especially appealing in a competitive market where attracting a broad pool of qualified residents – and keeping them – is of the utmost importance.

“Since substituting financial returns on rent for concessions, we’ve seen occupancy rates remain high as residents simply like being rewarded in such a seamless way, and it makes such a big impact in their lives,” Zietlow said. “Offering residents financial incentives not only encourages them to renew their lease, but it also motivates them to pay their rent on time while building more financial stability in their lives.”

Operators are using financial incentives to not only improve resident retention rates and encourage lease renewals, but also proactively mitigate delinquencies. Data shows offering financial benefits on rent promotes an increase in on-time, in-full payments – a notable advantage in the economic climate of today.

In a rental market marked by economic vacancy, rent decreases and concession increases, operators are embracing more innovative solutions to attract and retain qualified residents while improving NOI. By implementing a well-designed and targeted incentive program, operators can better navigate the challenges of such a competitive market and pave the way for a more sustainable and profitable future.

“Innovative incentive optimization platforms allow residents to reap financial rewards, which they can channel towards savings or other essential expenses, strengthening their financial footing,” Snyder said. “On the other hand, it helps position our communities to attract and retain more qualified, long-term residents who pay their rent on time every single month. This cycle significantly contributes to developing stronger, more resilient communities.”

Andrew Ruhland is Account Executive and Content Writer for LinnellTaylor Marketing.