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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.

  • 27
    "Why would that be?" A foolish landlord. Maybe he's a government bureaucrat who doesn't understand the law of supply and demand. – RonJohn May 14 '18 at 0:21
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    @RonJohn If there is oversupply, then OP can just go find a better offer. The fact that he is asking the question rather than doing that suggests that that isn't the case. – richardb May 14 '18 at 10:42
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    Is this a large complex that is managed by a professional management company? Did you confirm that it was a specific unit and that the same unit is still being advertised? Generally they will advertise a generic unit (e.g. 1, 2 or 3 bedroom) but the specific unit isn't available until you're actually signing a lease. They always have empty units, but which units they are changes from month to month as people move in and out. – Colin Young May 14 '18 at 12:13
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    This isn't really a personal finance question. More an economics one. – Cloud May 14 '18 at 13:00
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    @RonJohn: "Maybe he's a government bureaucrat who doesn't understand the law of supply and demand." Or he's learned some marketing basics and makes use of the contrast effect ("Not $999, not $99, NO, now for only $9"; i.e., first expose/accustom customers to big numbers, then show smaller numbers). Or she might have increased prices in order to be able to display discounts in the offer. Or expenditures increased. Countless possibilities, many of which are not categorizable as "dumb". – phresnel May 14 '18 at 16:33
152

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.

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    yes, please write to the landlord. Just because I am really curious which out of all the possible reasons it is! – Bananenaffe May 14 '18 at 13:32
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    I think the seasonal effect is the biggest reason - in Calgary (where it's quite cold and snowy for many months of the year) you almost never see houses for sale in Febuary - few want to sell (or buy) because it means moving in terrible conditions, and those that do get bought quick because they're so cheap, usually to flip for an extra 10-15% of the price come summer. If only I had a few extra million dollars to get in on action. – corsiKa May 14 '18 at 14:54
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    Also, property values tend to rise in most places and inflation happens, too, so it's entirely possible that this was just a routine adjustment to keep up with the market that happened to occur at a bad time for the OP. – reirab May 14 '18 at 15:37
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    In cities with universities, flat rents are cheapest at start of summer, when many flats are abandoned by students who drop off, finish the carreer, manage to commute from home, or switch to a student residency. Rent price gets suddenly expensive at end of summer, when lots of first year students rent a flat for the first time. Many flats will stay empty all summer. By renting at start of summer, and paying rent all summer months, you can secure the most desirable flats at reasonable price. – Enric Naval May 14 '18 at 16:06
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    I've asked landlords as suggested and they have given the exact answer you've put here - namely, that they always increase prices through the spring because they know demand will go up and they will be able to rent units at a higher price in the spring season. It's also a tool that property managers can use to encourage you to start a lease earlier, as in, "If you sign right now, it's $1000 per month, but it goes up to $1200 per month next Wednesday". – Todd Wilcox May 15 '18 at 15:27
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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.

  • Also all rent reviews depend on showing that rents have gone up, so renting one unit out at a discount can prevent putting the rent up on all units. – Ian May 19 '18 at 11:30
  • I read that article linked to at the beginning of the post, and all I can say is ... wow. Now I understand why so much prime real estate in Manhattan and other large cities goes vacant and landlords don't want to reduce the rent. – Sam Jun 6 '18 at 19:36
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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.
  • When ranting on other answers, shouldn't you make sure that your exact rant does not apply to your own answer? Half of your points where mentioned already. – phresnel May 15 '18 at 5:24
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    @phresnel - which one was mentioned already? – TTT May 15 '18 at 7:49
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    @phresnel "rant"? Where? – Yakk May 15 '18 at 16:05
  • @Yakk - I made a comment to phresnel's answer... – TTT May 15 '18 at 16:33
  • Depending upon how many apartments are rented, when those units are coming up for renewal, their present rent levels, and whether the landlord expects tenants to renew, the landlord might want to avoid having to reduce rents while renewing leases. If a tenant could save $30/month by moving to some other landlord's property, the $360/year savings might not be worth the time and effort of getting, loading, and unloading a truck. If an apartment in the same building could be had for $30 less than the cost of renewing the current lease, however, that might be another story. – supercat May 16 '18 at 16:47
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.

  • 1
    Almost everything you mentioned was already stated in the other answers... – TTT May 14 '18 at 18:01
  • @TTT: What was mentioned when I posted my answer: [x] Contrast Effect. [ ] Enable special-price highlighting. [x] Probing other price segments, piercing magical numbers, attraction. [x] Match inflation & expenditures. [ ] Simulate out-of-stock e.g. to maintain SEO or because too dumb. [ ] Out of clue, trying random things. Given that, it seems my answer is less of a duplicate than yours (which I upvoted, btw), where 50% of the possibilities where mentioned already (like in my answer), but in absolute terms, my answer adds more (3) than yours (1). – phresnel May 15 '18 at 5:23
  • I would consider your first two bullet points to be the same reason: pump up the price to discount it. And the top answer mentioned the person is simply foolish and don't know what their doing (similar to doesn't have a clue). The only one that (IMHO) was clearly not mentioned was the scenario where maybe they didn't have any in stock or didn't know how to manipulate the online interface, neither of which would apply to a building with vacancies. So I had it at 1 of 6 not mentioned and that 1 didn't seem to apply... – TTT May 15 '18 at 8:04
4

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.

  • Is there a rent control system that actually works that way? It would create some normally-unwanted incentives that would ensure landlords held properties off the market until they were able to raise the rent. – Zach Lipton May 15 '18 at 7:38
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    Rent control always creates some unwanted incentives; it's an inevitable side effect. Apparently, New York City's rent stabilization program has a somewhat similar feature, although not exactly how I described it. When a tenant moves out, the landlord can raise the rent by 20% - plus an additional amount if there was a major renovation or building repair. – Kevin Keane May 16 '18 at 0:06
  • Sure, that makes sense. Other systems allow landlords to reset to market rate after a tenant moves out. I've just never heard of a system where the landlord can only raise the rent more if the unit goes unrented for a certain period of time. – Zach Lipton May 16 '18 at 0:26
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    It more that if the landlord reduces rents, they can't put them up again, hence better to be empty for a short time. – Ian May 19 '18 at 11:32
  • @Ian Excellent point. Even worse, lowering the rent may affect all rentals in the area. – Kevin Keane May 20 '18 at 20:34
3

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.

2

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.

0

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.

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