What does "lease trade out" mean?

What is Lease Trade-Out?

"Lease trade out" in the context of multifamily properties is a metric used to evaluate the financial performance of rental units over time. Specifically, it measures the change in rental income from one lease to the next. Here's a breakdown of what it entails:

  1. Comparing New and Old Leases: When an apartment is leased out again, the rent of the new lease is compared to the rent of the previous lease for the same unit. This comparison helps in understanding how much more or less the new tenant is paying compared to the old tenant.
  2. Indicating Market Trends: An increase in lease trade-out value typically indicates that the market is strong, and the property is able to command higher rents. Conversely, a decrease might suggest a weaker market or that the property is losing its competitive edge.
  3. Impact on Revenue: The overall impact on a property's revenue is significant. Higher lease trade-outs suggest increased income, which can lead to a higher valuation of the property.
  4. Management Performance Indicator: It also serves as a key performance indicator for property management. Successfully increasing lease trade-out values can demonstrate effective property management and marketing strategies.
  5. Influencing Factors: Several factors can influence lease trade-out, such as the local real estate market, the condition and amenities of the property, the effectiveness of advertising and tenant relations, and broader economic conditions.

Lease trade out is an important metric for property owners and managers in the multifamily sector, as it directly relates to the property's income-generating capability and overall market position.

What Does New Lease Trade-Out Percentage Measure?

New lease trade-out percentage measures whether new leases are renting above or below the average in-place rents. It is calculated by dividing the total of all in-place rents by the total of all new leases during a set period.

This calculation provides a clear indicator of whether rents for new residents are trending upwards or downwards. An increase in this percentage suggests that new leases are being signed at higher rates than existing leases, indicating a potentially strong market or improved property value. On the other hand, a decrease might signal lower demand or increased competition, leading to lower rents for new leases.

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