Where are Apartment Resident Retention Rates Highest and Lowest?

And Do Higher Retention Rates Mean More Revenue?

(Hint: No.)

Apartment resident retention rates continue to climb across the country. Even with rapidly rising rental rates and record volumes of apartment construction, apartment renters are increasingly choosing to stay put rather than move out.

So, which markets are apartment renters most likely – and least likely – to renew their leases? MPF Research compiled the average renewal conversion rate over the past 12 months (from May 2014 to April 2015) in the nation’s 50 largest metro areas. The results may surprise you – with the top markets tending to be slow-growth metros in the Midwest and Northeast.
And do higher renewal retention rates mean better rent and revenue growth? No. In fact, stronger revenue growth was seen in markets with lower renewal conversion rates – indicating that many operators are overvaluing resident retention at the expense of potential revenue.

The statistics come directly from a subset of the nearly 10 million units available to MPF Research as a division of the RealPage platform. The renewal conversion rate is the share of apartment renter households with expiring leases choosing to renew their leases for the same units. For the U.S. overall, the average monthly conversion rate over the last year was 52.3%. Milwaukee led nation with an average renewal conversion rate of 64.1% over the last 12 months. Only three others – New Orleans, Miami and New York – topped the 60% mark. Philadelphia, Cleveland, Detroit, San Francisco, Boston and Hartford all came in between 55.5% and 59.0%.

How about the bottom 10? This list may be even more surprising. San Antonio lands at the bottom with an average renewal conversion rate of just 43.4%, well behind the next-lowest spots, Jacksonville at 46.0% and Tampa Bay at 46.6%. Perhaps most surprisingly, Denver/Boulder – one of the hottest markets in the country – is part of a two-way tie with Phoenix for the nation’s four-lowest renewal conversion rate at 47.6%. Five more come in right around 48% – Columbus, Orlando, Portland, Indianapolis and San Diego.

How do we make sense of these lists? Well, if you know the apartment market, you know the top 10 list for renewal conversion has little resemblance (outside San Francisco) to any list you’ve seen previously for top performances in rent growth or revenue growth. It’s more similar to an occupancy rate leaderboard, which tend to be dominated by more mature, slow-growth markets predominantly in the Northeast and Midwest regions of the country.

We do know the Northeast and Midwest are seeing flat labor turnover and hiring trends, while the South and West regions are seeing more turnover and more hirings, according to the Bureau of Labor Statistics. We’ll explore this topic in more depth in an upcoming blog, but higher labor turnover likely leads to more mobility, which in turn contributes to more turnover in the apartment base. We also know that more transient markets tend to be stronger economies. In fact, looking at average annual job growth over the last three years, markets with lower retention rates tended to see better job growth than markets with higher retention rates. San Francisco was a notable exception, with very strong job growth and a high retention rate.

Additionally, markets with high renewal conversion rates tend to have an older median age of the population. And we also know that mobility rates go down as ages go up. The average median age in the top 10 markets for renewal conversion was 39.4, while the average for the bottom 10 group was 37.2 – more than two years younger, according to the Census. The gap would be three years if not for Tampa, the outlier of the low-conversion rate group.

It’s worth pointing out a few factors that are not as correlated to market-level resident retention rates as you might expect – such as construction, rent levels or single-family prices.

Does higher resident retention equal more revenue?

We’ve explained the differences between markets with high and low renewal retention rates, but those differences don’t answer the key question: Do more renewals equal more revenue?

Conventional wisdom often views higher retention as a positive. But the best markets for renewal retention are not top performers by most rent and revenue metrics. In fact, as a group, markets with higher retention rates tended to be below-average performers in terms of both rent growth and revenue growth. Conversely, markets with lower retention rates posted better performances.

The bottom 10 markets for renewal conversion outperformed the top 10 markets in terms of year-over-year revenue growth, 4.9% to 4.3%. The bottom 10 also outperformed on lease-over-lease rent growth for new residents (5.3% to 4.3%) and even for residents renewing their leases (4.5% to 4.1%), in spite of lower occupancy rates.

Why is that? There are likely a few reasons. Many property managers leave money on the table by either underpricing renewals or by valuing occupancy over bottom-line revenue. The apartment industry has learned over the years that renewing too many renters could be a sign they aren’t pricing renewals aggressively enough. Related to that point, operators are typically willing to push rents more for a new resident than for a renewing one.

That isn’t to suggest lower renewal conversion rates are better. In fact, that 4.9% average revenue growth figure for bottom 10 markets roughly matched the U.S. average. The top markets for revenue growth fell somewhere in the middle of the pack for renewal retention.

So, what’s the magic number? Well, the optimum retention rate differs from market to market, from period to period and even from asset to asset. Optimizing revenues is a sophisticated balancing act that considers a broad array of factors – which is why revenue management has become a mainstream tool in the apartment industry. In other words, renewal conversion is one among many metrics to monitor. But that one alone is no magic potion for better returns.

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