Question: How Fast Will New Rentals Be Absorbed?

To start, let’s state the obvious: the easiest way to ensure your new rental building leases quickly and starts generating revenues as soon as possible is to ask rents which are affordable or ‘attainable’. But few, if any, developers have the luxury of asking rents that the bulk of renters can afford. The reality is that every developer, given development costs, needs to achieve the highest possible rents. That means targeting renters with higher incomes, a smaller pool of renters, in other words, and accepting the likelihood that leasing will take longer. So is there a balance? And how fast should a new rental building lease-up?

First off, no matter how much developers and lenders would like consultants to quote them a lease-up rate that they can expect to achieve in their new project, it’s simply not possible to give one. If pressed, I could quote a likely low/high range for the rate at which a new rental building might lease. But, since every project and every market is different, and since the lease-up rates each new project achieves is different, aggregating or combining real-world examples to come up with a reliable “average” or “expected” lease-up rate is almost impossible. Why? Because the sample size is always too small (three or four new lease-ups per year across Ontario is not a sufficient sample size) and the projects and markets are incomparable (you can’t compare a lease-up in Ottawa with a lease-up in Brantford, no matter how successful both have been).

With this in mind, instead of talking about specific lease-up rates and specific rental projects and trying to calculate rates which could apply to future rental projects, I’m going to talk about general factors that affect lease-up duration, since the total length of time from start to finish has a huge impact on a developer’s finances, i.e. how much money they need to borrow and for how long.

Here are some ways to help speed up lease-ups, in rough order of impact:

  • Make sure asking rents are attainable by renters in the market. If renters can’t afford your asking rents then they won’t rent. I recognize that new buildings need high rents to justify their construction, but don’t try to bring five-diamond pricing to a middle-of-the-road market. And don’t try to out-price your competition—there is no prize for having the highest rents in a given market and your only goal is to fully lease your building at rents which are profitable for you.
  • Choose a location with a larger pool of renters. Larger urban areas obviously contain a lot of potential renters, but many medium and small size markets also contain a high percentage of households renting, so don’t overlook those. That said, a new rental building in Toronto has access to more potential renters than a new rental building in Bracebridge, for example.
  • Choose a location without much competition. Ideally, you’d like your new rental building to compete with old-stock buildings which only have price as an advantage since they can’t offer the same level of amenities and unit features as new buildings. Small size markets typically have minimal competition, but many medium and large size markets, despite their size, have few “new” rental buildings since new development has been uneven.
  • Design amenities and unit configurations that are attractive to renters. Most renters during a tour can quickly assess if a unit is liveable and well configured, or whether they’ll have to compromise to live in it. Building amenities should make sense for the market and renters.
  • Hire determined leasing staff and put in place a professional leasing operation. Upmarket renters, the primary source of renters for new rental buildings, see renting as purchasing a product and service, not a necessity. This means good customer service is essential to make a good impression and professional leasing helps improve closing (and leasing rates)—upmarket renters want to be “sold” almost as much as condo buyers do.
  • Implement a good marketing plan. Most people who aren’t in real estate don’t track new development so when they want to a new apartment they rely on internet searches. This means you need to reach potential renters directly and thoughtfully via the internet.

Ultimately, the single most effective way to ensure a successful and (hopefully) speedy lease-up which achieves the rents you need to get, is to offer an attractive value proposition to renters. Remember that renters considering new rental buildings are generally not “gotta rent” renters and in many cases could afford to rent a house or townhouse or even buy a house—if you can offer them good units and good amenities at reasonable rents, bolstered by good customer service and a professional leasing operation, then they’ll rent.