There is a fine line between growing rental income and creating vacancy that needs to be understood when managing a property. Economists describe this tension as “Price Elasticity of Demand”. It is a measure of the shift in demand for a product or service when a change occurs in one of the variables that buyers consider as part of their purchase decision. A product is “elastic” if consumers will change their purchase decision when, for instance, the price goes up. Inelastic is the opposite; think of the iPhone. Price doesn’t seem to affect the purchase decision. All products and services can have different price elasticity. For the apartment rental business, price changes can have a direct impact on attracting and maintaining tenants. Due to the inconvenience of moving, our business is definitely less elastic than, for instance, the purchase of eggs, but there is a point where price increases will lead to more vacancies, especially during the slow winter leasing season.

The seasonality of the rental market has returned after a brief respite driven by Covid. Now, during the winter it is much harder to attract new tenants, so it is critical for management to have their finger on the pulse of the market and avoid creating vacancy through pricing. Another challenge in many areas of the country is increased supply. In Q3 2023, we saw the largest number of new apartment deliveries since the 1980s with over 400K units opening up for lease, and this will continue into 2024. New builds have been deploying aggressive pricing on lease ups, leading to a rental decline in some areas like Austin and Phoenix (-4%). Again, apartment managers need to be aware of the changing rental market and seasonality of demand when making pricing decisions on new leases and renewals.

It is useful to look at the math behind the theoretical effect of price elasticity on apartment rentals. For every apartment rental situation there is a relationship between price increases and vacancy depending on the micro-economic factors in the surrounding area. In the graph below you can see that rent increases up to $40 a month have very little impact on tenants choosing to leave due to price, but at $50 something changes drastically. Every apartment manager needs to carefully monitor where they can move rents without triggering a mass exodus.