No real estate investor likes the idea of reduced rents, but every good property manager understands that offering the right rent concessions could help fill vacancies or improve lease renewal rates at just the right time.
When it comes to analyzing concessions offered by the competition, it has always been a labor-intensive process for investors and managers alike. The “specials” offered by most properties are not posted publicly, and when a special is posted on a property website or listing site, it may have so many qualifications and date restrictions that it is difficult to determine the true impact on rent. Because of this, most analysts end up navigating to property websites or calling around to get concessions data – a very time-consuming exercise.
Fortunately, with large language models like ChatGPT, it is now possible to analyze rent concessions at scale – and HelloData is using this technology to make it much easier for investors to account for concessions in their underwriting. In this post we’ll cover:
A rent concession in the multifamily context (such as apartments or other multi-unit rental properties) is a discount or incentive that a landlord offers to a tenant – typically to encourage them to sign a lease or renew an existing one. It can also be a strategy to attract renters in a competitive market or during periods of high vacancy.
There are many different forms of rent concessions, but the most common are:
1. Free Rent: The most common type of concession, where the tenant is not required to pay rent for a certain period, e.g., the first month of a 12-month lease.
2. Reduced Rent: Monthly rent is decreased for a specified period. For instance, a unit that usually rents for $1,000 per month might be offered at $900 per month for the first six months.
3. Waived or Reduced Fees: Fees for applications, background checks, or amenities might be waived or reduced in this type of rent concession.
4. Gift Cards or Cash Back: Some landlords offer gift cards to local retailers or a cash-back option after the tenant has moved in or after a certain number of months.
5. Move-In Specials: These can include offers like free moving services, free or discounted parking, or other services that might entice a renter.
6. Upgrades or Improvements: Offering to put in new appliances, paint the unit, or provide other upgrades can also be considered a form of concession.
Rent concessions can be beneficial for both parties. For the landlord, it can minimize vacancy durations and attract long-term tenants. For the tenant, it can lead to financial savings, additional amenities or other benefits.
Net effective rent is a metric used in the real estate industry, especially in multifamily, to reflect the average monthly rent that a landlord will receive from a tenant over the lease term after accounting for any landlord rent concessions or leasing incentives.
Net effective rent is particularly relevant when landlords offer promotions like "one month free on a 12-month lease" to incentivize lease signing. By calculating the net effective rent, landlords and property managers can understand the actual income they will earn on average each month over the lease term.
Here’s how to calculate net effective rent:
Net Effective Rent = (Total Monthly Rent x Lease Term - Concessions) / Lease Term
For example, if there’s a 12-month lease on an apartment with a monthly rent of $1,200, and the landlord offers a one-time concession of $1,200 (one free month’s rent), the calculation would be:
Net Effective Rent = ($1,200 x 12 - $1,200) / 12 = $13,200 / 12 = $1,100
So, the net effective rent is $1,100, even though the asking rent (the one advertised on the property website or listing site) is $1,200 per month.
The terms "net effective rent" and "effective rent" are often used interchangeably. Some in the industry might use "net effective rent" specifically when referring to a calculation that also factors in additional costs or benefits like property tax abatements or operational costs, however.
Collecting data on asking rents is great, but the best indicator of the true market rent is a signed lease.
If you just navigate to several property websites and copy asking rents into Excel for your market analysis, but they are all offering 1-month free rent and waived fees, your market analysis simply won’t reflect the market.
Unfortunately, signed leases for competing properties generally aren’t publicly accessible. Property management solutions like RealPage, Yardi and Appfolio have access to this data, but unless you own the property, you don’t. So analysts have to navigate to listings, read and interpret the specials, calculate the effective rent, and add it to their analyses manually. Or at least they used to....
We recently added a new algorithm that uses natural language processing on top of a large language model (LLM) to extract the types and dollar values of concessions from specials posted in rental listings.
By fine-tuning the LLM and building in logic to capture different elements of each concession, we can now capture many different data points on rent concessions, including the number of free months, the dollar value of one-time discounts, and conditions like deadlines to get the discount and the required lease term to qualify. Here’s a breakdown of all the attributes we currently capture and their meanings:
Free Months – How many months of free rent are offered?
One-Time Dollars Off – Is there an upfront, one-time discount offered?
Recurring Dollars Off – Is there a recurring discount spread out over the lease term?
Lease Term Condition – Does the lease have to be a certain number of months to qualify?
Deadline Condition – Does the lease have to be signed by a particular date?
• Application Fee
• Admin Fee
• Security Deposit
• Move-in Fee
• Application Fee
• Admin Fee
• Security Deposit
• Reduced Rent
Once we have extracted each of the values above from the advertised specials, we run the same effective rent calculation outlined above to distill these attributes into effective rent. All of this is automated of course, so you don’t have to personally review tens of thousands of specials and neither do we!
In addition to extracting the dollar value of rent concessions, our algorithms analyze market data every day to capture when units are first listed, how their prices adjust over time, and the last rent before the units were taken off the market. Here's how that looks in the interface:
The final listed price is usually the best indicator of the market value for a unit, and when coupled with the effective rent calculation, this provides the best possible estimate of the actual rent (aside from having the actual lease). Based on our analysis of about 13k specials currently being offered from listings across the U.S., the most common concession is still 1 month of free rent, but there are a variety of one-time discounts that occur almost as frequently. The following graphs including the frequency of each concession type, the number of free months offered, and the discount amounts for one-time and recurring concessions amortized over the lease term:
Next up, we're developing an algorithm to estimate the percent of units renovated in a value-add deal based on the QualityScore of the listing photos and the distribution of rent prices in the building. Stay tuned!
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