Apartment Renters are Renewing Leases at Historically High Levels

U.S. apartment renters are increasingly choosing to stay put rather than move up to new apartments, move down to cheaper units or move out to buy homes. Apartment resident retention rates hit a decade-high in February 2015, continuing a five-year upward trend.

Apartment lease renewal conversion hit a long-term high of 54.5% in February. Stated another way, only 45.5% of apartment renters with expiring leases chose to move out, according to an MPF Research analysis of actual lease transactions recorded in RealPage Inc.’s industry-leading apartment operations software. The lease renewal conversion data also accounts for early move-outs – meaning that renters who moved out prior to lease expiration are treated as non-renewals.

Renewal conversion rates have been climbing since the apartment market recovery started – surging in early 2010, then continuing to tick up steadily. Year-over-year, renewal conversion jumped 80 bps as of February 2015. That extended a stretch of 22 straight months without negative year-over-year change.

Low turnover is especially notable given that new apartment supply is plentiful (completions are reaching 25-year highs) and that rents continue to increase substantially (spurring some fears that renters are being priced out of their units). Brisk lease-up velocity in new apartments combined with low resident turnover at existing properties speaks to the depth of demand for apartments.

RealPage’s apartment lease renewal conversion metrics are the industry’s first to draw from individual lease transactions getting tracked daily and covering an expansive swath of geographies, property management companies, owners and apartment property types. Previously published renewal conversion information has been limited to a handful of individual apartment firms reporting on their own data. Traditional survey methods track only new lease rental rates, as the vast majority of apartment properties do not publicly release renewal pricing. MPF Research will continue to track renewal conversion, as well as other lease transaction-based metrics, regularly moving forward.

The analysis focuses on a same-store set of apartments utilizing RealPage software products between 2009 and 2015. Apartments in the dataset are professionally managed and tend to be of institutional quality. The West and South regions, where the apartment stocks are more focused on institutional quality product, comprise larger shares of the dataset than the Northeast and Midwest. A separate analysis focusing on a smaller set of properties operating from 2005 to 2009 shows that apartment resident retention never exceeded 51%. Thus, February 2015’s 54.5% conversion ratio for expiring leases marks the high point recorded over the past decade.

So, what’s the significance of an escalating tendency to renew expiring apartment leases? The study suggests some interesting conclusions. Among them:

• The data confirms what apartment REITs (real estate investment trusts) have been reporting to Wall Street. Most REITs have in recent quarters cited high retention rates and low losses of renters to home purchase – and that’s generally been true not only of REITs focused on core urban markets but also of REITs focused on suburbs and secondary markets.
• It appears that strong rent growth across the country in recent years is not compelling large numbers of renters to start looking for cheaper living arrangements – on the whole, at least. Affordability is a hot topic in the industry these days, but the lease renewal data is one indicator that most renters haven’t hit a budget ceiling … yet.
• High retention rates at existing properties suggest there is the limited immediate risk of overbuilding, even with apartment construction nationally at 25-year peaks. While markets tend to weaken when renters of existing properties flee for heavily discounted leases at newly built apartments – pushing up vacancy and compressing rent growth potential, that hasn’t happened to date in this cycle.
• February tends to be the peak month for renewal conversions, perhaps due in part to weather-related influences. In each of the past five calendar years, U.S. apartments saw renewal rates peak in February and remain high through April. Conversely, renewal rates typically drop off around mid-year (the peak leasing season) and then again in December. These seasonal patterns may offer clues for operators to better price renewal leases – which has historically been a challenge simply because operators have traditionally had zero visibility into competitors’ renewal pricing trends.

And perhaps the most important question: Can renewal conversion rates continue to climb? Our best guess is that they’ll soon level off and then gradually slide. Improving economies tend to eventually trigger increased mobility – more moving up, more moving closer to new jobs, more marriages, more babies. Any changes in lifestyle or life stage could lead to new housing choices … and thus, increased turnover.

But that isn’t necessarily a bad thing. Some apartment operators are more willing to push rents higher on a new lease with a new renter than they are for a renewing lease with an existing renter. In that case, moderately lower renewal conversion rates could actually shepherd in bigger overall rent growth. Of course, the key word there is “moderately.” A significant drop-off in renewal conversions – triggered by decreased demand or by oversupply – could force operators to panic and slash new lease rents to backfill vacant units.

Given the newness of renewal conversion data to the research world, there is fertile ground for additional study. Each of these topics warrants separate discussions, but here’s a quick peek:

• Does higher renewal conversion translate to higher rent growth? Not really. Perhaps surprisingly, the correlation isn’t strong.
• Which metro areas tend to notch the highest renewal conversion rates? The leaderboard tends to be dominated by more mature metro areas. But as noted above, those metros aren’t necessarily the top performers for rent growth.
• Is renewal conversion higher in urban areas relative to suburbs? Conventional wisdom says yes, but the data says no. In fact, the suburbs renew renters slightly more often. This suggests that institutional investors, who tend to favor urban assets, might be overstating the impact of single-family homes in suburban locations and understating the tendencies of transient urban renters to remain transient.

And the list of questions goes on: What drives renewal conversion rates? What is the relationship between pricing for renewing-lease residents versus new-lease residents? What types of properties register more lease renewals? Is there an optimum range for renewal conversion to maximize revenues? MPF Research will continue to explore this topic going forward.
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