Insight 12: Be Cautious With Concessions

By Jay Parsons, Andrew Bowen and Carl Whitaker Need to stir up some demand for your apartments? Offer up concessions! Or maybe not… It’s one of the most controversial topics in apartment pricing, but the latest data indicates operators are increasingly shifting away from old-school rental concessions except in very specific circumstances – such as rent-controlled markets and new lease-ups. Concessions provide property managers a sense of control, but often at an enormous future cost. Properties that heavily leveraging concessions coming out of the Great Financial Crisis experienced delayed rebounds and other lingering side effects on rent rolls, convincing many asset managers to pursue other strategies for stimulating demand. Concession Utilization in the COVID Era To that point, concession utilization since COVID-19 rocked the U.S. economy has consistently come in far below the levels seen in prior recessions. Back in 4th quarter 2009, concessions were available on 65.6% of all available units in stabilized, market-rate apartments. By comparison, in 4th quarter 2020, concessions were offered on only 22.6% of available units (data excludes lease-ups, where concessions remain more common). Average concession values have also plummeted – from 9.2% of the annual rent (or about 5 weeks free) in 2010 versus about 3 weeks free in 2020. To be fair, apartment occupancy nationally held up better in 2020 than in 2009. But the shift away from concessions occurred even more in urban submarkets where vacancies spiked over the last year. In those submarkets, the occupancy drop in 2020 matched the sharp decline seen in 2009. And yet concession utilization measured only 38.4% in 4th quarter 2020 compared to 57.2% in 4th quarter 2009. Why Concessions (Usually) Cause More Damage Than Good Here are five key reasons why more asset managers and property managers are turning away from concessions – even in low-demand, occupancy-challenged environme...