Searching for peak leasing performance
Poor leasing is one of the major reasons that owners fire their property management companies (PMCs). Since leasing is one of the most controllable variables in property management, it’s reasonable to hold PMCs to a high standard. Of course, whenever the leasing market cools, owners often harbor the sneaking suspicion that their leasing team just isn’t cutting it. But what degree of frustration is actually justified?
In this article, I contend that it is actually extremely difficult to quantify what constitutes good leasing performance beyond the avoidance of mistakes, or leasing outcomes so obviously poor that they cannot possibly be justified as strategic.
To start, we should first define the actual objective in multifamily leasing. Fundamentally, the leasing equation is trying to achieve the optimal balance between price, speed, and cost. For example, as you increase the unit’s price, you sacrifice speed through increased days-to-lease. However, you might try to counterbalance that by increasing your costs in the form of greater concessions, increased advertising spend, or higher broker’s commissions. We can neatly summarize the financial outcome of a lease with the below formula that balances revenue against losses from vacancy, concessions, and other costs. This provides a clear metric for maximizing leasing profitability.
And while Net Value clearly quantifies leasing economics, there are definitely a few factors that are not fully encompassed within the formula.
Other Considerations
Tenant Quality: Tenant creditworthiness, which boosts Net Value by reducing default risk but may increase Days Vacant or Concessions/Marketing Costs, should be integrated into the formula, though the optimal method (e.g., risk premium) is beyond this article’s scope.
Regulatory Constraints: In rent-stabilized markets (e.g., New York, San Francisco), the formula misses the strategic need to secure a higher legal gross rent, even at the cost of more Days Vacant, higher Daily Costs, increased Concessions, etc.
Major Financial Events: The formula’s static view ignores strategic events like refinancings or sales, where higher Days Vacant or Concessions may be justified to achieve elevated rents, boosting NOI and cap rates for better debt terms or exit multiples.
Renewal Likelihood: The formula omits tenant retention dynamics, where above-market rents or heavy concessions may deter renewals, increasing future turnover costs and vacancies.
Now, let’s suppose that the property owner is even able to rigorously monitor the Net Value of the leases completed by their PMC. They still have two major problems with which to contend if trying to objectively evaluate performance.
First, there is no counterfactual to Net Value by which to compare. Could running a more expensive advertisement on Apartments.com actually have reduced Days on Market enough to outweigh the cost? Should we have increase concessions and offered them sooner to achieve the necessary pricing for the penthouses? It is impossible to say with any degree of certainty.
Second, and as described above, the ideal Net Value is highly subjective. Each operator has different immediate financial goals, risk tolerance, etc. And yet, properties are fighting over the same pool of available renters.
So, should we conclude that there is no possible objective measure of leasing performance? Perhaps, but first, let’s think again about why owners fire their managers for leasing issues. I believe that there are three usual scenarios:
Blaming the management company for market issues
Instinctual (or potentially irrational) behavior
Leasing mistakes made by the management company
The first scenario is not particularly interesting. When faced with market volatility, these owners are effectively “selling everything that is not bolted down.” The second scenario is far more interesting. Given that leasing is incredibly difficult to quantify, smart owners have likely developed an instinct around recognizing skill. This is akin to Justice Potter Stewart’s famous opinion: “I know good leasing when I see it.” Smart owners may develop this instinct by observing patterns, such as speed in preparing marketing materials or efficient pricing adjustments.
I think that is likely the most prudent way to evaluate a manager as an owner. But what does it actually mean? I believe that this gut feeling about good leasing comes from getting the feeling that this is the sort of operation that avoids making mistakes. To address this challenge, we can identify leasing practices so objectively poor that they constitute undeniable mistakes, regardless of strategic intent. But can we successfully define a mistake?
Below is an attempt at a comprehensive list of leasing practices so objectively bad that they can be considered mistakes. Again, the key here is that these outcomes could never be justified as strategic under any circumstances. Of course, mistakes are unavoidable. But proper observation is critical to mitigation.
Mistakes
Failing to post a unit to internet listing sites within 7 days of vacancy (poor marketing execution).
Not responding to inquiries within 24 hours (poor leasing execution).
No tour availability on weekends (ignoring peak renter availability).
No price reduction after 2x median portfolio days-on-market (failing to adapt to market signals).
Tour-to-application rate > 80% with more than 5 tours in the first week (indicating extreme underpricing).
Multiple (>3) price reductions on the same unit (failed price discovery).
Price reduction >15% in one step (inefficient price discovery, risking lost revenue without testing increments).
Unit takes > 60 days then rents at < median price (calibrated too slowly, resulting in unnecessary vacancy costs).
I plan to follow up this post with a more detailed breakdown of these leasing mistakes and procedures that can be put into place to avoid them. In the meantime, what leasing red flags have you spotted in your own portfolios? Share in the comments below.