The Property Management Shop
by Marc Wilson
Q. I have had three vacancies for five weeks at my 18-unit apartment building. I keep lowering the rent, but I’m not getting any applications. Should I just keep them off the market until the economy turns around? I’d hate to rent them at the bottom of the market and then get stuck with low rents when the jobs come back. Also, should I show all three vacancies or just one to prospective tenants?
A. I read an article a few months ago about the managing partner of a big law firm in San Francisco. The firm’s client base consisted mostly of high technology firms. Monthly billings were significantly below the previous year. The partner said that he would never, ever consider laying off attorneys no matter how bad their bottom line got. I remember thinking, “who is this idiot?” Needless to say, the managing partner in question is no longer managing the law firm. He was replaced with someone capable of adjusting to current market conditions.
The real estate business is no different. You need to adjust your expectations to current market conditions. You do not have any control over what your apartment is currently worth. You must find the market and strike a deal. Time, I’m afraid, is not on your side. You see, unemployment is still growing and new residential housing product continues to come on the market. In other words, demand is still decreasing while supply is increasing. Rents will not start to firm up until this set of facts changes. Don’t overprice your apartment unit and chase the market down. Simply price it correctly and do a deal. If you spend three months trying to find the market, you will ultimately rent the apartment but the rent will be less than had you priced it appropriately from the beginning. It could be two, three or perhaps even five years before we start to see serious upward pressure on rents again. I’ve got news for you—there are no entitlements in this business and it also doesn’t matter in the least what you rented your apartment for in August 2000. In 1992, my associates were fond of saying “stay alive until 1995.” Now, I’m beginning to say “stay alive until 2005.” Some things never change.
You might not have any control over what your apartment is currently worth but you do have control over your tenant profile. You can price your unit so that you get multiple applications from people who have good jobs and higher expectations than being renters all their lives. Don’t compromise your tenant profile. You are better off to lower your rent. Don’t pack multiple tenants into a small apartment, don’t rent to tenants with dogs, don’t rent to tenants with bad credit histories and, where legally possible, don’t rent to Section 8 tenants. Why? Because if you do these things, you will reduce the probability of getting turnover when the market recovers. Why take a couple extra bucks now in exchange for longer vacancies and the possibility of a reduction in turnover in the future? I know plenty of landlords who packed four single people into large flats only to find one of the four still living in the unit at a low rent 15 years later. Wouldn’t you have been better off to rent to a nice couple at a lower rent? They would have moved to Marin 10 years ago, and you would not be stuck with low rents and revolving tenancies.
To answer your question: no, I would not intentionally keep any units vacant. If you are that concerned about getting locked into a low rent, you should spend your excess energy buying more units so that you will be more diversified and achieve more turnover, instead of trying to squeeze water from a rock. If I have multiple vacant units in the same building, I will give prospective tenants the opportunity to list their order of preference if they are interested in more than one of the available apartments. You might as well show them all of the units. However, don’t show them more than three for otherwise the prospects will be less likely to pull the trigger in the face of so many options.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Marc Wilson has been managing and selling San Francisco apartment buildings for 15 years. Please send your questions concerning property management and/or apartment building sales to Marc Wilson at 1699 Van Ness Avenue, SF, CA 94109. He can be reached at 415-229-1275. © Copyright 2002.