Why is rent going up in an apartment complex with multiple units sitting unrented?

Question

I'm moving to a new city at the end of the month and am looking for an apartment. I found a property that I like, but the rent was a little more than I wanted to pay. So I decided I would take a risk that it would be leased out and let the rent decrease as the complex tried to attract renters. However, the apartment's advertised rent is going up instead...

The apartment is in a top 100 US metro area in the southern US and there are currently 13 units open with another 7 coming available within the next week. This is in a city with a fairly large public university (although the apartment building is ~20 miles from the campus)

Why would that be? It seems like they should try and increase demand by lower the cost, or at least keep it steady...

Update: The complex just dropped the price back to what it was originally.

Answer 1

They are likely approaching a known busy new-tenant season. It's not uncommon to see rent and housing prices increase as the summer approaches as there are many families who move during that time. School's out and maybe the family wants the children to move schools or don't want to interrupt the school year. People who found places to live right after graduation would have leases that end in May or June and they might be on the hunt for somewhere new.

You also don't specify how you know the complex as a whole is not doing well with occupancy. If other units are being rented out, and their total availability is declining, then it's only natural for prices to go up. (Thinking of a larger apartment complex in this scenario).

Maybe their cost of doing business has increased and they need to offset that and can't afford to have a unit locked in for a whole year at that rate. They might be taking a risk that they have a month empty, but 12 subsequent months at a higher rate than they would have.

Another theory could be that they found that their price point put them under more desirable renters. If someone is searching to rent an apartment and is looking for something in the $1,000 - $1,300/mo range, an apartment being rented at $850 might not hit the radar. Maybe the opposite is true and they're getting too many people applying that this is at the top or over their budget because they fall into the price range of people with lower budgets.

Or, Like RonJohn commented, maybe they're just foolish and don't know what they're doing. There are far too many variables for anyone to give you an actual answer without speaking to the landlord. Which brings me to this:

Ask them. Call the landlord up and say "I was researching apartments and found yours at $X amount, but I see now the price has gone up to $Y. Have improvements been made or has something been changed like including utilities? I would be interested in renting the apartment, but I was hoping to be in the $W - $X range. Would you be willing to negotiate?" Who knows, maybe you'll get to rent it for what you were looking for. Maybe you could offer a 2 year agreement or a higher deposit in return.

Answer 2

Charles Marohn of Strong Towns, a licensed urban planner, said this when describing the obvious solution to high vacancies:

With a sound grasp of free market economics, the developer understands that supply and demand equilibrate with price. If the units don’t fill at $10,000 per year, then the price has to be lower.

...

Let’s say our developer drops their prices by 20% and so the market clearing lease rate is now $8,000 per year.

Now the developer's bringing in $64,000 per year instead of $70,000 per year. That’s okay. They're still making their payment to the bank. They're still keeping up with the maintenance. Their investors aren't happy to take a haircut, but that’s part of the risk of investing. So, this is stable, right?

Not really. Commercial loans are generally financed over 3-, 5- and 7-year timeframes. That means every few years, the developer is going to have to roll over that loan. When they do, the value of the building is going to be based off the current market rent, which in our case, is now 20% less.

So instead of having a building that is worth $1 million, your building is now worth just $800,000. When you go to get your next loan, the bank is only going to lend you $640,000. And, in a falling market, they might be a little bit nervous about that.

He goes on to say that it's often a much better option to have incentives such as some period of free rent attached to a lease agreement rather than lowering prices, because the addition of an incentive doesn't lower the value of the building. If that strategy doesn't work, it is STILL often better to let rentals sit vacant and "expend and pretend" that the situation is stable, because other actions don't even give you enough time to have a chance at getting your investments back.

Please note that this write-up was created in reference to commercial space rather than residential; however, it is a perspective that I think is missing from the other answers.

Answer 3

In addition to BobbyScon's answer, here are two more common reasons for a high vacancy apartment complex to raise their prices:

1. If most of those that decide to rent would have paid more, then raising the price makes sense. This is true regardless of what the current capacity is.
2. The age-old discount trick: bump up your prices and then offer a time sensitive discount to "trick" new customers into buying "today". Increasing the rent also allows you to offer X months free without a change in revenue.

Answer 4

I can imagine several possibilities:

• Usage of contrast effect. The offering person may want to expose potential customers to big numbers, in order to then present them smaller numbers (especially to those who bookmarked that offer). This effect is also in use in classic TV marketing ("Not $ 99. Not $ 85. NO! Now only for $ 70").
• The offering person may want to make use of the portal's discount highlighting: "$ 999 / month now only $ 799 / month!!!"
• The offering person may want to probe another price segment, especially when piercing beyond decimal magic numbers. Think of both different demographic segments as well as attracting bigger renters by sheer price tag (think Apple or Porsche).
• Maybe it was just that time again when growth of price needs to match inflation (or more, of course). The landlords expenditures might have increased, and in turn the price would have increased with or without a current renter.
• I've seen strange cases in online shops where sellers increased prices dramatically because they had none on stock and bid on no one buying the product. Why? Hmm. SEO, maybe. Or because she did not know how to set the stock amount in the online interface 5 minutes before calling it a day.
• The offering person is out of clue and tries random things.

More is possible.

Answer 5

The city may have rent control laws that only allow raising the rent by a certain percentage after a tenant leaves, possibly for a certain period of time. Maybe the landlord wasn't free to raise the rent earlier, but now is free to do so.

Answer 6

I live in a city where this is common, at least the last 2 years. The answer may be very straight forward in a case where prices rise regardless of "immediate" demand: expected demand because people are flocking to the area. The competition of this one apartment I checked raised prices 4 times in one week along and was completely full within 2 weeks. The apartment I checked raised prices as well even with no immediate increase in demand, but they knew that as people kept moving to the area they would eventually be full because:

• No other apartments, homes, condos, are available
• People could move further away, but have to pay higher prices for a commute and our gas prices are skyrocketing right now. Commutes cost gas and time!
• The population growth is continuing to boom with no signs of slowing.

The apartment I contacted is now completely full. It took a month, but it happened.

Is this happening in your city? Not sure, but it might offer an explanation. It could be the other possibilities listed.

Answer 7

You cannot judge the state of the market by looking at a single offer. It's entirely possible that rental property in that area is in high demand, it's just that this one property is vacant more than usual.

Imagine you have 10 apples which you sell for $1 each. Yesterday you've sold 5 apples. Today you see that other apple sellers have increased the price to $2. Would you do the same? I mean, you couldn't sell those remaining 5 apples yesterday, so from that data alone you'd discount your apples instead.

Of course, if it's a real market trend that there's an oversupply of rental property, it won't take long for you to find a cheaper lot elsewhere.

Answer 8

Let us grab some numbers out of the air:

The apartment complex has 20 apartments.

15 are rented at $2000/mth. 5 are empty.

Total income: $30000.

Alternative 1:
Lower rent to $1400. All apartments are now rented. But the total income is now $28000.

Alternative 2:
Raise rent to $2500. 2 tenants leave, 13 stay. Total income: $32500

It looks like having empty apartments actually earns the owner money! Who would have thought it?

These numbers were obviously made up to show my point, but the point remains: Don't automatically assume that empty apartments mean a loss to the owner.