Wednesday, April 29, 2009

Occupancy and Rent Change News Can Mislead You

When you see a headline saying rents or occupancy in a market has declined, you need to remember you need to consider both rents and occupancy to understand what’s going on.  Lansner on Real Estate reports multifamily rents and occupancy are declining in Orange County, based on a RealFacts first quarter survey. The chart accompanying the story illustrates my point:


Which is the best performing city? Which is the worst?

A few seconds spent trying to answer this question makes it clear; you need to consider both rent and occupancy trends to arrive at the right answer. Costa Mesa is the best performing city, because even though its rent decline was one of the worst, that decline was more than offset by the improvement in occupancy. Placentia was the worst performing market; even though neither its rent nor occupancy decline was the worst, on a combined basis its performance was substantially worse than the other cities.

You might think that occupancy and rent levels move up and down in tandem, and usually you would be right. However, there are actually four possibilities:

  • Your occupancy goes up, but your rents go down (see Newport Beach and Costa Mesa). This can happen if you reduce your rents and attract more tenants.
  • Your occupancy goes down, but your rents go up (see Buena Park, Laguna Niguel, Garden Grove, and Cypress). This can happen if you raise rents but drive tenants away.
  • Your occupancy goes up and your rents go up (no place in Orange County this quarter). This happens in tight markets which are seeing tenant growth in excess of supply additions.
  • Your occupancy and rents both go down (all the other Orange County places in the table). This happens when there are fewer tenants in a market (the case almost everywhere today).

So, when you read about a decline in either rents or occupancy, remember you need to consider both in order to understand what’s going on.