Adapting Leases to Modern Renter Expectations

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Guide to Understanding Renter Expectations

Amenities and Concessions

In competitive markets, tenants seek operators who offer unique amenities and incentives. Examples include community areas (such as gyms), smart home technology, online services, financial perks, leasing incentives, and more. With the rise of competitive new inventory in 2024, renters can expect a wider selection and more incentives as multifamily operators prepare for the surge in completed projects.

Top Expectations

Location

The concept of location is evolving due to smaller household sizes and a desire for walkable neighborhoods. It's shifting away from traditional family-oriented facilities like schools and daycare centers. Now, it's more focused on proximity to public transportation, local businesses, and appealing amenities.

Affordability

It's not only about the monthly rent figure anymore; renters are increasingly savvy when it comes to grasping the overall expenses. There is a growing awareness regarding deposits, fees, utilities, and penalties. Operators must now justify these extra costs or differentiate themselves with a fresh set of "financial amenities" such as inclusive "unlimited" utilities, lease release initiatives, and others.

Flexibility

Many tenants are looking for flexible lease terms, such as month-to-month arrangements, the option to sublet if necessary, and the ability to leave early if required. This trend is influenced by affordability concerns and shifting demographics, including:

• Increased economic uncertainty
• Greater career flexibility
• Remote work patterns
• Life stage changes
• Evolving household sizes
• Temporary moves

People are hesitant to make long-term financial commitments due to expensive housing markets and a desire for more opportunistic purchasing habits.

Rental Demand

Demographics Matter

These expectations arise during a significant demographic transition in the renter demographic, shifting from millennials to Generation Z. Similar to the transition from Generation X to millennials in the early 2010s, this change involves older millennial renters moving towards homeownership, albeit at a slower pace than previous generations. Simultaneously, new Generation Z renters aged 18-25 are entering the renter population. Renting offers a chance for independent living as individuals transition into adulthood. The trend of delayed marriage and parenthood has heightened the appeal and need for renting into later stages of adulthood.

Another key factor is sustained growth in the number of higher-income renter households making more than $75k per year. This comes at the same time as increased growth in individual and 2-person households, which is indicative of the generational shift. The number of renters earning at least $75,000 annually has risen 43 percent since 2010, to 13.5 million as of 2022 (2010-2022). The percentage of renters earning at least $75,000 annually has risen by more than 6 percentage points to 30 percent during this same period (2010-2022).

This growth is largely coming from dual-income, no-kids ("DINK") or roommate households that are college-educated. These households are more likely to be young (under 35) than the average renter household as well. These demographic shifts continue to push demand for premium, modest-size units that are still in the range of affordability.

Renter expectations around lease terms have changed in recent years

Flexibility has grown in significance for renters. While renters have typically committed to leases lasting 12 months or more (with 66.8% of leases falling within the 12-24 months range), there are indications of a notable shift in this trend.

Increased Demand for Flexible Lease Terms for 12+ Month Leases

Operators are under pressure to provide flexible lease terms due to economic uncertainty, rising career mobility, and the shift towards remote work. Renters are becoming more aware of the actual costs associated with breaking a lease, which may involve:

• Penalties equivalent to one or two months' rent
• Responsibility for paying rent until the lease term ends
• Loss of the security deposit
• Potential legal action from landlords
• Adverse effects on rental history
• Negative impact on credit scores if unpaid rent or legal judgments are reported to credit agencies

Rise in Short-Term Leases

Just like the growing demand for flexible long-term leases, shifting work patterns, an interest in exploring new neighborhoods, and seasonal relocations are significant factors driving the surge in short-term leases.

Subletting Apartments

It mirrors, and in some aspects contrasts, the trend of short-term leases increasing. Residents who temporarily leave for travel or work often seek to offset expenses, particularly with rising rents. Subletting offers a solution for residents leaving temporarily or wanting to terminate their lease early, although it involves substantial effort and risk.

Increase in Month-to-Month Leases

Month-to-month leases offer unparalleled flexibility for long-term rentals. Enjoy the benefits of securing a long-term rate while retaining the flexibility of short-term leases. However, renters should be aware of the potential risks associated with these leases, as they can lead to significant vacancy losses for operators.

Lease Terms By Length

What lease term options are renters currently seeking?

The most popular lease terms range from 8 to 18 months, attributed to the pricing influence operators hold, especially in the multifamily sector. The majority of new leases signed span 12 months (92% in 2022). However, as renters renew, there is a rise in the proportion of month-to-month agreements and renewals exceeding 12 months.

1. Short Term Leases: Short-term and long-term lease options appeal to distinct renter demographics. Short-term rentals lean more towards hospitality than housing, usually spanning less than 30 days for travelers or vacationers.
2. Mid-Term Leases: Mid-term leases usually span 3-9 months with minimal renewal rates. These leases, a fresh product innovation, cater to traveling professionals, recent movers, interns, and individuals seeking temporary housing solutions. Although mid-term leases generally come with a 10-20% price increase compared to long-term leases for the same unit, they necessitate more frequent turnovers.
3. Long-Term Leases: Long-term leases typically last for 12 months or more, followed by rolling long-term contracts.

Large-scale providers give operators the ability to price units dynamically and offer a variety of lease terms (often from 8 to 18 months) at real-time market rates. There are significant regulatory headwinds for revenue management, but large multifamily operators are increasingly adopting this technology for better price discrimination (economic definition of discrimination) and improved ability to capture renter demand.

Financial Amenities

The landscape of lease terms is being transformed by innovative financial amenity programs such as lease release programs and flexible rent payment programs. Renters now have the freedom to tailor lease terms to their liking while minimizing risks for operators. A notable instance is flexible rent payment services, enabling renters to divide rent payments, traditionally due in full on the 1st of each month, into multiple installments throughout the month. This payment flexibility benefits renters without increasing collection or delinquency risks for operators.

What does it mean to offer flexible lease terms?

In today's rental landscape, where renters are experiencing more frequent and unpredictable life changes, there is a growing demand for flexible lease terms. Instead of facing costly and unfriendly lease termination policies that impact over 7% of the 44.1 million leases in the US annually, property managers are adapting by offering flexible lease options. These arrangements allow tenants to exit their lease at any time without incurring additional fees or penalties, known as a Lease Release Program. This innovative financial offering is revolutionizing the rental experience, making it straightforward, hassle-free, and empowering for a new generation of tenants with evolving expectations.

How can flexible lease terms impact renter satisfaction and retention?

Renters prioritize a comprehensive renting experience, from moving in to moving out, more than operators may realize:

1. 42% of renters indicate that break fees influence their reviews.
2. 84% of renters emphasize the importance of the overall renting experience as much as the physical apartment itself.

Break fees in leases, similar to cancellation fees in other industries like early termination fees for cell phone contracts, change fees for air travel, and early return fees for car leases, are widely disliked by renters. Feeling significant frustration and stress can lead to decreased satisfaction with the rental process, resulting in negative press, reviews, and implications for future leasing. Inadequate communication and explanation of break fees and lease terms can also be detrimental, with 55% of renters feeling deceived by their leases at some point. Implementing flexible lease terms can offer a straightforward solution, providing renters with peace of mind and enabling operators to offer a pleasant move-out experience.

What role does technology play in offering and managing flexible lease terms?

Technology plays a significant role in providing and managing flexible lease terms and various financial programs. Jeff Bezos once said, "Focus on what makes your beer taste better." He highlighted the example of breweries from the early 20th century generating their electricity, yet it did not enhance the taste of their beer. In this context, financial technology ("fintech") vendors offer essential solutions, enabling operators to offer flexible lease terms effortlessly. This approach saves resources that would otherwise be spent on developing new capabilities, prevents underwriting errors, and mitigates risks that could impact the company's profitability.

Challenges property managers face implementing flexible lease terms

Providing flexible lease options, such as a comprehensive lease release program, can pose a significant challenge for property managers and operators when initiated independently. This challenge can be attributed to two key factors:

1. Underwriting and risk management
2. Renters' claims experience

Utilizing financial technology can effectively address these obstacles by offering operators a seamless platform that provides solutions for both aspects:

1. Financial coverage and underwriting that safeguards operators against unexpected vacancy costs and turnover expenses, covering up to six months of rent when a resident leases prior to the end of their lease
2. User-friendly software that streamlines the activation and claims process for renters utilizing program benefits

By leveraging these solutions, operators can implement flexible lease programs without assuming risks or the need to invest in new processes and technology for their staff.

How digital lease agreements improve the leasing process

Today, numerous renters are accustomed to digital paperwork and anticipate the ease of digital signatures for their leases, just like other essential services they use. When was the last time you signed a paper contract in your personal life to buy or license a product? The benefits for leasing are fairly straightforward, it’s a massive efficiency and cost savings:

• 50-70% savings on admin costs relating to filing, storage, and recordkeeping alone
• 30-40% less time managing leases

It's not just about the digital lease itself but also about the ability for owners to offer bundled renewal incentives and effectively advertise digitally compared to paper leases. Despite the benefits, there are concerns from less tech-savvy renters who may not trust digital leases as much or accidentally sign documents they didn't mean to.

• Some companies see a 25% increase in lease renewals due to digital leases allowing for better incentives and advertising compared to paper leases.
• 60% of property management companies with over 1000 units use digital lease agreements alongside or instead of paper leases.