Vacancy Spiral of Destruction

July 18th, 2010 · 1 Comment · Commercial Property, Property Management, Rental Property

The first step to dealing with vacancy is to admit there is a problem. Denial is not your friend. The more units you have the worse the problem can become. This is because every month tenants leave and new tenants come in. Your base expenses for your suites remain roughly the same regardless of whether you have a paying tenant or not. Once a certain percentage of suites are tenanted the remaining suites are your profit margin. This is why as a building owner you must pay very serious attention to these remaining suites.

Differentiating between Turn Over and Vacancy
People move in – people move out – that’s turn over. In a utopian environment 20 people would leave one month and 20 people would enter. The rest of the suites would be full. This never happens in real life. What commonly happens is 20 people move out, you spend a month getting the suites rent ready, the next month, during the month you rent 15 of those units and 5 rent ready units are left for the next month. 20 people leave the next month and 22 suites are rented. This leaves you with 3 empty and then 26 people move out and 18 move in. This leaves you with 11 turn over suites. The next month is an awesome rental month and only 18 people move but you rent 36 units and have 3 suites left.

Vacancy problems occur when inventory builds up. Just 3 suites not rented at the end of every month means 36 continually empty at the end of a year. You will continue to pay mortgage and heating and property taxes on those empty suites. When the problem becomes severe you start having to send checks to cover your expenses. You become the proud owner of a cash sucking cow of a property.

Reducing Expenses

Your first reflex action is to call your property manager and tell them to reduce expenses because you don’t want to send them more money. You may fire them and find a new property manager. The problem likely continues. The air is thick with excuses. The building stays vacant. You go visit your building and everything looks ok, except it’s empty. It’s the market, rents are too high. Meanwhile behind the scenes this is what’s happening.

  1. Suites for rent are not being renovated
  2. Pest control is minimized
  3. Ensuite repairs neglected
  4. Other necessary repairs are not being done in common areas
  5. Advertising is reduced.

If this sounds like a downward spiral it is. Meanwhile back at the ranch, your staff continues to try to make you happy so they can keep their jobs. They are no longer calling you for money so that’s great. You notice that your building is still partly vacant but it’s not costing you money so you don’t care. You call your property manager and tell them to fill up those empty suites and you don’t care how! You’ve stopped the bleeding and now you want some profit.

Your property manager has no budget to make the building more attractive by repairing the common areas or the suites so he does the one thing left.

THEY RELAX RENTAL APPLICATION REQUIREMENTS

Your new tenants have a pulse and first and last. You ask for job letters but now instead of company letterhead, you’re getting job letters on lined paper scribbled in pencil with some guy’s cell phone number as a reference. Good Job!

Evictions

Next you’ll find that evictions are up. Tenants are moving out but after they rip you off for months of rent. You don’t like this either because it costs you lots of money. Paralegals are expensive. Meanwhile your base costs are the same or even higher. Common areas are appalling, graffiti and vandalism are pretty common. Your good tenants move out more and more often, before 20 people moved every month, now it’s thirty.

Fire alarms ring at your building a couple times a day. The fire department starts fining you. You fire your property manager again. You change staff. It’s all their fault!

Your new property manager tells you to reduce your rent. You need to fill the building. the quality of residents decreases yet again. If you tilt your head and squint your eyes, you can see the traces of former beauty in your building under the layers of grime. The place is dirty. The cockroaches are endemic.

The vacancy spiral of decay and destruction.

You want to change things and you don’t know how, you’ve fired staff and done everything you know how to do and it still continues. People surrounding you are telling you what you want to hear instead of what you need to hear. Arresting the spiral and bringing your building back to profitability will take a year or more depending on where you are on the spiral and how far you’ve gone down this path. At this point, you’ll be having to order red ink by the case. There’s no magic bullet either! Every single issue will have to be addressed. It’s not sales, or decay or customer service in isolation. It’s all of the above.

It is possible to deal with vacancy problems. It requires commitment, hard work and better than average staff. They will need a generous budget to solve your problems and make your building profitable. You need to change your focus from saving money to making sure suites are attractive and rent ready. Advertising budgets need to go up!

You can stop the spiral!

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