Lease Renewals, Consumer Sentiment, & More

release edition [018]

read time [7 minutes]

Welcome to The Multifamily Download, a weekly newsletter where I provide institutional insights to help you build an exceptional Multifamily career.

Today at a Glance:

Lease Renewals: GTL vs LTL
Consumers: Sentiment Sours
Poll: Requesting Your Help
Weekly Listen: The Rent Roll

Lease Renewals

One of the toughest components of owning Multifamily property is determining the lease renewals.

What new lease rate is appropriate to offer? Should an increase be offered? How much is 'too much'?

To begin, it's incredibly important to know what the current market rent is for the expiring unit inclusive of concessions.

What would a prospective resident be willing to pay for this unit today?

If the current resident's in-place rent is higher than the market rent then this is called a gain to lease, or GTL.

If the current resident's in-place rent is lower than the market rent then this is called a loss to lease, or LTL.

GTL residents are more likely to non-renew and leave on the basis that they can save money by living elsewhere. But, moving is time consuming and costs money, so residents with minor GTLs are unlikely to leave.

That said, I am weary of issuing rent increases to GTL residents in softer markets for four reasons.

1. If I offer an increase and they deliver a notice to vacate, or NTV, would they have stayed if I didn't offer an increase? I'll likely never know, so it's impossible to learn the right lesson.

2. If I offer an increase and they stay, will they be disgruntled and potentially harm the reputation of the property, either online or offline? Sure, it's a small risk, but a risk nonetheless.

3. If I offer no increase and they submit an NTV then their reason for leaving was most likely not rent related. That said, I ask my property managers to always call residents with larger GTL (>$100) if they submit their NTV to see if we can get them to stay with a small concession or gift.

4. If I offer no increase and they stay then they will likely be a very happy customer. Happy customers are good.

Scenario 1 above is by far the worst for several reasons: (a) the 'big bad landlord' reputation risk, (b) turnover costs (think paint, floors, cleaning, damage, renovations, etc.), (c) vacancy cost, or lost rent, (d) increased resources for marketing and/or leasing to find a new resident, and (e) it's self inflicted and ultimately just greedy.

In my opinion, there is never a scenario in which a resident with an in-place GTL should be offered an increase.

Now, if the resident has an in-place LTL, how much should their rent be increased?

The methodology of one of my property managers has worked like a charm, and it's incredibly simple.

Here it is: Increase halfway to market but cap the increase at $95.

If a resident has a $250 LTL, but only gets a $95 increase, why would they move elsewhere to pay more rent?

Formulating a strategy for renewals is critically important when operating multifamily, especially today amid record deliveries in many markets across the country.

Renters have more options than ever before, and lease renewals can have a tremendous impact (positive or negative) on occupancy, collections, effective gross income, expenses, and net operating income.

Great asset managers have a healthy internal tension between maximizing rental income and maintaining resident satisfaction.

Embrace the tension.

Consumers

Over the past few weeks, data has continued to show rapidly deteriorating consumer sentiment.

Notably, the March survey from the University of Michigan showed that sentiment is falling across all income levels (see chart below), consumers are concerned about losing their jobs, consumer believe business conditions are worsening, income expectations are declining, and inflation expectations are rising.

"Notably, two-thirds of consumers expect unemployment to rise in the year ahead, the highest reading since 2009. This trend reveals a key vulnerability for consumers, given that strong labor markets and incomes have been the primary source of strength supporting consumer spending in recent years." - Surveys of Consumers Director Joanne Hsu

Regardless of any bias that may be embedded in the survey group or resulting data (i.e democrat vs republican), the strong downtrend mentioned above is noteworthy.

In simple terms, consumers are concerned about stagflation, which is a challenging combination of elevated inflation and elevated unemployment.

As shown below, all three categories of this survey are down both MoM and YoY.

As I've been watching this data unfold the past few weeks and months, there are a few items that I'm curious to watch unfold.

1. Self-Fulfilling Prophecy

As I wrote about here on LinkedIn recently, falling consumer confidence could become a self-fulfilling prophecy. If consumers are fearful of the future (employment, wages, inflation, etc.) then they will stop spending, which will slow the economy, leading to falling employment, lower wages, and (most likely) lower inflation.

2. Confidence is THE GAME

For the avoidance of doubt, and to drive point number one above home, confidence in the future is what drives consumer behavior and spending. Fear, uncertainty, and doubt ("FUD") has a way of paralyzing an economy. We witnessed this during the stock market meltdown a few weeks ago, when extreme FUD was being priced into the markets. Now that the future is looking smoother, the market is rebounding including nine straight days of positive returns for the S&P 500.

3. Indicators are Indicating

As you can see in the charts below, there are indicators that continue to signal a down trend towards a recession.

Gold has surged over the past year plus to recent all-time-highs of $3,500+ per ounce.

As a result, the copper-to-gold ratio has reached a bottoming level that is commensurate with recessions in times past.

Additionally, many Americans have a significant percentage of their net worth in their residence, which in many cases is a relatively liquid asset, meaning that a home can be listed and sold in fewer than 90 days.

Today, this trend is souring quickly.

The share of inventory with a price cut is higher than it has been in quite some time, shown below.

Resiclub reported that 60 of the nation's 300 largest metro area housing markets had falling prices YoY from March 2024 to March 2025. In February, the count was 42 markets. In January, the count was nearly half, or just 31 markets.

Additionally, the number of unsold completed homes for sale has reached it's highest level since 2009, shown below.

An increasing number of home owners are learning (or about to learn) that the value of their home is not what they thought.

I'm generally in the "mean reversion" camp, in that prices have a funny way of finding their way back to the trendline over time.

Quick math: The median housing payment (P&I) shown below of $2,810, plus estimated taxes, insurance, and PMI equates to an all-in monthly payment of ~$3,500. Now, at an implied 43% DTI, the buyer's monthly gross income must exceed $8,100 per month, or nearly $98,000 to purchase a $410,000 home.

Logically, it does not make sense that home prices have continued to rise as interest rates have also risen (2007, anyone?) amid record multifamily supply (more housing options for otherwise home buyers) and remarkably favorable builder incentives (rate buydowns, price cuts, etc.)

If buyers can't buy then sellers can't sell and therefore prices must come down.

I know this is an ultra simplified scenario and explanation, but it's just math.

Single family home sales are one way to measure the private sector's velocity of money.

If homes aren't selling, or they're selling at ever-lower prices, then the velocity of money will slow or come to a halt. Price discovery always breaks down before buyer capitulation.

As long as renting is materially cheaper than owning (shown below) then I expect home prices to decline, even as real wages continue to rise.

To add fuel to this fire, credit card delinquencies are up to GFC levels, banks are tightening credit access, job searches are taking longer, and auto delinquencies continue to remain elevated.

Another leading indicator are the sales of heavy trucks, shown below.

My goal, as always, is to inspire free thought. I don't know what the future holds, and neither do you, but thinking about the probabilities of what may happen is important for making decisions today.

Thankfully, job numbers have been strong the past few months, but keep an eye on jobs and SFR sales in the weeks and months to come. If both trend negatively then be prepared for the recession that many believe is already on the horizon.

Poll

Well, after two slower years in the Multifamily business, the market is starting to show meaningful signs of life. Our pipeline is picking up with $60M under contract and $175M+ under negotiation. As a result, my time is becoming more scarce and I will need to be thoughtful in how I allocate it.

I enjoy writing this newsletter, and I hope you enjoy reading it. That said, I am evaluating the future format and offering, so I'd greatly appreciate your feedback as I do so.

If you could, please vote below and hit reply to this email to let me know what you'd like to see going forward.

As always, thank you for reading The Multifamily Download!

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Weekly Listen

This week's listen is episode 31 of The Rent Roll podcast with host Jay Parsons and guests Scott Villani and Dan Hull from one of America's largest apartment developers, NRP Group.

Jay, Scott, and Dan discuss the impact of tariffs on the Multifamily sector. (spoiler alert: it's not nearly as bad as you might think).

You can listen to the full episode here.