The rate that tenants move from one unit to another affects the length of time a project needs to achieve full occupancy. It also influences a project’s annual revenues and operating expenses. The National Council of Housing Market Analysts (NCHMA) defines turnover as:
- An estimate of the number of housing units in a Market Area as a percentage of total housing units in the Market Area that will likely change occupants in any one year, and
- The percent of occupants in a given apartment complex that move in one year.
B. Factors to Consider
- Renter households likely to be seeking housing during lease-up period: Not all households move in a specific year. Using turnover, or annual movership rates, in demand analysis can help estimate the number of income qualified tenants likely to be seeking rental housing during the lease-up period.
- Variation in turnover rates within market areas: Tenant mobility rates depend on the characteristics of the market-area. Locations with low vacancy rates and regulatory restrictions that discourage mobility have low turnover rates. Market areas that are seasonal in nature or have more transient renter households (such as students or developing suburban communities) have higher rates.
- Within market areas, turnover rates vary among project and household types: Younger households are more apt to move than older households. During periods of market softness, older properties, especially those in below average condition are more prone to lose tenants, than newer, better maintained developments.
- Project-specific Absorption Periods: If a project’s lease-up period extends beyond the typical lease term (such as one year), it may be necessary to relet units vacated by the initial tenants before the property achieves a stabilized occupancy.
- Anticipated Rental Income: The proportion of tenants who do not renew their leases or vacate their units before the end of the lease term and the amount of time required to relet empty units affect a property’s annual rental income as well as its average annual occupancy rate.
- Operating Expenses: The ratio of tenants who vacate their units over the course of a year affects the operating expenses needed to prepare empty units for new tenants and locate new tenants.
C. Red Flags
- Use of Non-comparable projects: Using averages for all projects or projects that have different profiles may cause inaccurate turnover estimates.
- Lease-up periods that exceed 12 months: Absorption estimates that are based on an average rate of leasing new units may understate the time required for a project to realize stabilized occupancy.
D. Recommended Practices for Analyzing Turnover
- Market Area Movership Rates: Identify the market-area renter turnover rate, using Census Statistics, International Association of Real Estate Management (IREM) publications, or other regional apartment surveys.
- Turnover Rates of Comparable Projects: Survey comparable projects to determine property-specific turnover data. Where applicable, note variations in movership rates among different project types, such as market-rate, tax credit, and age restricted properties in various age and rent classes.
- Demand Analysis: When required by the scope of work, discuss the degree of turnover among renters during the project’s lease-up period. Establish and justify the turnover rate used in the demand analysis.
- Project Turnover Rate: Based on available empirical data, discuss the likely turnover level the property will experience after it attains stabilized occupancy.
- Project Absorption: If the projected absorption period will exceed the typical lease term, evaluate the impact of the need to relet empty units on the project’s lease-up schedule. This evaluation should include the property’s likely turnover rate and the additional period of time needed to allow the project to achieve a stabilized occupancy.