2, 5 or 10 Year Tenant Leases!?

Are you wondering about the rental landscape for the next 1 to 2 years?

If we experience a downturn in the economy, it could increase renter churn, turnover costs, and perhaps the loss of some of your best tenants.

Should you stand by and let it happen? No!  It’s better to anticipate movement from all tenants who will leave to capture lower rent prices elsewhere. If mortgage rates drop in 2024 and the economy surges forward, many renters will buy a home, and leave their rental lease.

Whether they break a lease, leave at the end of the one year, or month to month lease, it represents a loss. Losing good tenants hurts.

Managing Tenant’s Outlook and Impulse

While the top concern of landlords is maintaining profitability, the chief concern of tenants in 2023 is lowering rent, keeping their rental unit and maintaining the status quo. Change right now is risky. That establishes an opportunity to promote very long term leases to keep them from fleeing in the next few years. Think ahead 5 to 10 years from now, and how many of your tenants you kept on lease.

Status quo is powerful.  Even for well-to-do tenants, the status quo has value in terms of proximity to work, moving costs, and comfort.  And for tenants under pressure, the threat of being renovicted or new owner removed from their rental is real. They may be willing to pay higher rent to help the landlord facing hefty mortgage refinancing increases and stave off losses. Being out on the street during a zero vacancy period is frightening.

Many of your tenants may not sympathize with your financial woes, but they know you might raise the rent much higher, renovict, or sell the money-losing property.

Churn, dropping rent prices, higher vacancy rates, turnover and leasing costs after 2024, along with troublesome new tenants are your worries. So for you as well, it’s better to keep the status quo.

CoStar Multifamily Report 2023

The highest number of new multifamily apartments since the 1980s is expected to hit the rental market this year. The supply will continue to outweigh demand—with sluggish rent growth as a result.

Based on Census.gov data, CoStar real estate group believes a rental construction boom is underway. They expect 520,000 new multifamily units to hit the market this year — the most units released since the mid-1980s.

Jay Lybik of CoStar said 140,000 units were delivered during the second quarter but only 107,000 were absorbed.  He forecasts 457,000 more units will be released in 2024.  Further, Lybik reports that show 520,000 units will be delivered this year, which will increase 4-star and 5-star vacancy rates to 9.1%. That will reduce that segment’s rent growth by 0.2%.

So for apartment landlords, especially for higher-priced units, it’s easy to see losses mounting.  If that’s yours, you need a tenant retention strategy.

Creating a Value Proposition to Capture Long Term Value

Overall however, most tenants would likely want to sign longer leases, even if they agree to a higher-than-average rent increase.

They know that in rent-controlled cities, the more likely path is renoviction, to reset the business, and let it be profitable again. After all, inflation may remain elevated (the 2024 recovery may reignite inflation and keep the FED rate painfully high). With rents dropping or only up 1%, vs steady inflation, business and tax cost increases, materials and staffing expenses, and no credit availability, many small business landlords may be under big pressure again.

Something has to be done or landlords may suffer continuous compounding losses. Our surveys of landlords show they are concerned with lower profitability this year. And if the FED tightening lag hits harder, lower rents will be the norm in the next 5 years.

The Power of the Longer-Term Lease

In other real estate sectors long-term leases are common, so why aren’t they in the residential sector? With home prices remaining high, wages stagnating, and new construction always lagging, many tenants are going to be lifetime renters. And many of them love their location, neighborhood and neighbors. It’s not uncommon for renters to stay in one rental house for ten years or more.

Currently, the 24 or 36-month lease isn’t a consideration to tenants or landlords. You can introduce it. In fact, not many states have limits to lease length.

Some of your worst renters will be leaving too, giving you an opportunity to require new tenants to sign longer term leases. Those who are highly motivated and stable won’t mind signing a long term lease.

8 Solid Reasons They’ll Sign a Long-Term Lease

There are lots of reasons, but if you can’t communicate this value to them in your tenant portal or website, then their perception of value is reduced.

1. tenant desires security which makes your rental home more attractive
2. tenants will be willing to pay more rent for that security
3. tenant wants to remain in that development/neighborhood for personal reasons
4. tenant operates a business out of the location and needs to remain there
5. 2 to 3-year leases appeal to more serious, committed and financially-enabled renters
6. longer leases with lower turnover actually helps keeps their rent prices down
7. you might agree to an important concession they want

New Appliances can reinforce the tenant’s feeling of comfort and decrease their perception of problems in the unit.

Tactics to Sweeten the Long-Term Lease

Getting the tenant to commit to a 2, 5 or 10 year lease might require some sweeteners:

• signing bonus
• free gift card (spa visit, sports ticket, restaurant meal)
• allow pets for free
• one new appliance upgrade
• install ceiling fan

Downside of the Longer Leases

If you’re locked into a long-term lease, it could reduce the resale value of your property since the buyer may not be able to evict until the end of the lease. And you may not be able to raise rent to cover costs or achieve the latest market rates.

However, the premise is to get them to lock into a higher rent price and that covers all your business needs.

Timing of your leases. Let your tenants rent month to month and then offer the long lease in October/November to position your offer when they are least likely to want to move. With the cold of winter approaching, they’ll view the opportunity with less «grass is greener on the other side» mentality.

Any leasing activity that helps you create more favorable outcomes is wise. Long-term leases can be leveraged for the above benefits, and when applied across hundreds of units, the dollar value is significant.

Find out more about how you can improve your leasing using ManageCasa and see all the impressive features you’ll be enjoying.

Online Lease Software | Lease Writing Tips | Lease Agreements | Lease Transfer | Transfer to Another Apartment | Lease Renewal Strategy | ReLeased | Virtual Leasing Apps | Virtual Leasing | Lease Management Software | Best Smartphones for Property Managers |  Property Management Software