My favorite metrics for tracking apartment conditions in the crazy market of 2021
I am a huge baseball fan, since my childhood I have collected baseball cards. I remember going through all of the stats printed in what must have been font size 4 on each card. Back then, I was focusing on the glamorous stats: home runs for batting and strikeouts for pitchers.
In the years that followed, baseball statistics grew exponentially in sophistication. A whole new field has been invented: sabermetry. Now, baseball fans are focusing on advanced stats that better capture a player’s worth. Baseball cards have also evolved. When my 8-year-old opens a deck of baseball cards these days (which, by the way, are now very expensive), he first looks at a player’s WAR (wins over replacement).
The apartment statistics have evolved in the same way over the years. The tools we now have to assess the performance of the apartment market are much more precise, more relevant and more timely.
This is especially timely as we sit down in the spring of 2021. Real estate of all types has been remarkably volatile over the past year. The demand for all types of housing far exceeds the supply. Houses sell for well above the list price. The growth in apartment rents is on track to reach unprecedented heights. How to better monitor the performance of the apartment market?
There’s a ton of data out there these days (including from RealPage), and we’re often asked to pick favorites. What are the main measures of market movement? Investors and traders want to get a feel for what’s going on right now and what’s to come.
A few quick qualifiers and a word about rent demand
For the sake of this discussion, a few qualifiers: I’m focusing on KPIs to track the performance of a market, submarket, or group of comp. This will be different from the KPIs that you might use to track your own assets and portfolio. Additionally, I share specific favorites monitoring very contemporary market trends here in 2021 based on the current environment. I would choose different KPIs to assess the long term prospects of a submarket or market.
The traditional measure of the performance of the apartment market is, of course, the demand for rental growth. You can also see it called “effective” rent growth, but it’s essentially the same thing.–a asking rent, just with an announced concession. Traditional rent growth is the best metric for assessing long-term trends over multiple cycles, given the depth of data sources available dating back decades. But this is not the best KPI “currently”. By design, demanded or actual rents are a lagging indicator. Property managers change their rents based on events that have already occurred–changes in supply (availability) and demand (prospects or leases).
Key KPIs for Market Movement
So what are the main metrics that become predictive of future rent movement? Everyone has their favorites and different KPIs provide different performance targets. Here are my benchmarks for tracking apartment market conditions and how I use them:
- Apartment rental traffic: You can call them prospects or guest cards or traffic. Regardless of the term, this is a great metric for monitoring future demand trends. Purchases will always precede lease signatures. I remember looking at this metric in amazement in May 2020–still at the height of pandemic lockdowns in most of the country–and see this remarkably growing tide of future demand. It has proven to be an excellent early predictor of lease signatures. And a great thing about rental traffic is that it’s not artificially capped by availability, unlike absorption (net rental), so you get a more complete view of demand.
- Rent exchange by lease-on-lease, aka Alternate Rents: This one is a bit controversial, but since I choose my personal favorites, I include swap as the rental metric of choice. The trade-out is the best measure of the price of apples for apples – what the rents actually mean compared to the previous lease for the same dwelling (new or renewed). The exchange of new leases has been shown to be remarkably predictive of future growth in asking rents. Stats chiefs tend to like this metric, but I also talk to executives who aren’t fans. Some will downplay trading due to its volatile nature.
- Rental income (Income / Available Square Feet or Total): Cash flow is a big part of the game for owners and operators, and income provides this measure. Revenue (from rental listings) captures all operational input metrics – rents, occupancy, vacant days between leases, renewals, etc. Revenue is, of course, an outcome and not a predictive KPI. I love watching when the first KPIs translate into bottom line revenue.
- Retention of residents and Average number of vacant days between leases: I intentionally combine them because I like to watch the two next to each other. Retention tells us what percentage of the existing resident base chooses to renew their lease in the same accommodation. Retention skyrocketed in 2020 when tenants were unable or unwilling to move, and we are now seeing normalization. In 2021, moderation in retention was a big win for operators, as units don’t stay vacant for long, and they typically capture much higher rents on new leases than on renewals. Balance is the key here. Many operators still maintain their overweight. In a high demand market, you need a churn rate to get higher prices in the market and increase the value of rents. In a low demand market, you need more retention to protect the value of the rent. By observing the average vacancy and other KPIs, you can better define renewal goals.
- Real income of tenants: These data (from tenant inquiries among leaseholders) are much more revealing than publicly available census income data. Trends in renter income tell us about affordability and rental growth. The good news right now is that incomes are rising and rent-to-income ratios remain quite stagnant. This metric now replaces rental collections (which appear to have stabilized) as the benchmark accessibility KPI.
Whatever metrics you prefer, choose data sources that complement traditional asking rents with metrics drawn directly from rents and financial data. Data from listing websites and internet surveys play a supporting role, but in a volatile market, you need the most accurate, predictive KPIs to stay ahead of the game.
Jay Parsons is Vice President and Deputy Chief Economist of RealPage.