Increasing NOI and Asset Value – The Case for Attention to Retention

Article originally appeared in the June 2010 issue of the National Apartment Association’s UNITS magazine.

By Doug Miller and Jen Piccotti

Attention to retention has increased as the rental pool has gotten smaller and smaller, as competitive housing has become more prevalent (condos, single family homes), as units are sitting vacant longer, and as concessions have grown.   Because there are not as many prospective residents entering the front door and the costs associated with every move-out has grown to astronomical levels, owners and managers have become more and more focused on how each team member can personally “close the back door” to protect cash flow, net operating income (NOI) and asset value.  To understand the critical impact of resident retention and the significant influence team members can have, one must understand the role of NOI and cap rates on asset value.

Why are NOI and Asset Value So Important?

NOI and increasing asset value are the reasons someone acquires multifamily assets.  That is why it is critical for everyone, from leasing consultants and maintenance techs on-site…all the way up the organization…to not simply understand what NOI and cap rates are, but to also know the significant impact both have on asset values.

Definition and Impact of NOI and Operating Expenses:

Let’s start with some definitions*:

  • NOI is Gross Operating Income minus Operating Expenses.
  • Gross Operating Income is Gross Scheduled Income (assumes 100% occupied, 100% collected) minus vacancy, concessions and credit loss allowances.
  • Operating Expenses are the costs necessary to insure the ability to generate income.  This includes utilities, supplies, property management, repairs, maintenance, and turnover costs – and every move out saved eliminates these latter costs!  Items not included are loan payments (may need a mortgage to buy, but not to operate), depreciation, and capital expenditures.

So, NOI is used to assess the value of assets: market value is driven by the income stream (NOI).  Today’s challenging marketplace impacts NOI due to reduced demand, higher concessions and increased vacancy loss days.  These costs are eliminated for every move-out that does not occur…so retention makes “dollars and sense” in good times as well as bad!

Definition and Impact of Cap Rates:

Next, we need to understand the definition* and role capitalization rates (cap rates) have on asset values.

  • The capitalization of income is used to estimate the value of an asset.  This assumes that value is related to the ability to generate NOI.
  • Cap rate is the ratio between NOI and present value: Cap Rate = NOI/Present Value.
  • Example: A property with $400,000 NOI that is valued at $6,155,000 means a 6.5% cap rate was used.

Estimating the Value of a Property:

Estimating the value, or what one would pay to acquire the asset, requires flipping the formula noted previously.

  • Value = NOI/Cap Rate.  The projected value is driven by the expected NOI and the buyer’s required cap rate (rate of return).  One buys assets expecting NOI will deliver the desired rate of return (cap rate).
  • If NOI for a property is projected to be $400,000 and a 6.5% rate of return/cap rate is used, the estimated value is $6,155,000.
  • A seller must consider a potential buyer’s other investment options, so attracting buyers requires a property being priced so its cap rate (buyer’s rate of return) is competitive.

Impact of Today’s Increased Cap Rates on Asset Value – An Issue:

Cap rates have increased the last several years due to the challenges of the economy and market conditions…with buyers and lenders expecting a higher rate of return due to increased risk.  What happens to asset values as cap rates increase?

  • Value/sales price drops as the cap rate increases.
  • Example: When the previously noted property with a $400,000 NOI is valued/capitalized using a higher rate of 8%, value drops to $5,000,000 (down from $6,155,000).
  • The reduced value creates challenges for the owner.

Impact of Industry Conditions and Increased Cap Rates on Assets with Maturing Debt:

Due to the economy, industry conditions and the banking crisis/credit shortage, cap rates have increased, so asset values have decreased.  What is the impact on properties with financing that is maturing or about to have interest rates reset?  The following shows the significant impact and why reduced turnover can dramatically impact NOI.

  • $400,000 NOI asset at 6.5% cap rate purchased for $6,155,000.
  • 90% bank loan-to-value means they will loan $5,539,500; the balance is funded by the buyer.
  • THEN cap rates increase since loan originated.
  • An increased cap rate of 8% drops the value to $5,000,000.
  • 90% bank reset/refi loan-to-value means they will loan $4,500,000; the balance has to be funded by the owner.
  • BUT FIRST, the original $5,539,500 loan must be paid off, however with the reset or refi the bank is only willing to finance $4,500,000…so the owner is “upside down” by $1,039,500.
  • SO, the owner must come up with $1,039,500 to erase the “upside down” for this one property!

How can one eliminate the “upside down” or raise the funds needed during challenging economic times when credit is tight?  There are several options to increase NOI:

  • Increase market rents.  Achievable during this horrific recession?
  • Renovate, reposition the property and increase market rents.  Again, achievable during this recession?
  • Slash operating expenses.  Are there any properties that are overstaffed?
  • Or, given that most turnover is controllable and that the cost of each move-out has a huge NOI impact, focus on reducing costly turnover using low cost/no cost retention strategies?

The answer is to focus on retention due to its significant positive impact on NOI and asset values (today as well as during a strong economy!).  To validate this point, how much does turnover cost?  What is its impact on NOI and asset value?

The High Cost of Turnover, the Impact on NOI and the Case for More Attention to Retention:

The cost of turnover has increased due to market conditions.  In addition, not everyone includes all of factors that impact this cost.  When evaluating an individual property’s true turnover costs, one must have a clear picture of the impact each resident’s move-out decision has on the property’s financial well-being:

  • Average market rent
  • Average vacancy loss days
  • Average wages for the leasing team to re-rent the unit
  • Average wages for the maintenance team to turn the unit and make move-in ready
  • Advertising and marketing costs
  • Referral or locator fees
  • Concessions
  • Leasing commission
  • Repair and replacement costs to make the unit move-in ready
Move-Out Cost: Challenging Market Conditions
Assumptions: Average
Average rent* $980.40
Average vacancy loss days 45
Average concessions $823.54
Maintenance tech average hourly $18.32
Maintenance tech average hours to turn a unit 9
Leasing agent average hourly $16.96
Leasing agent average hours to show and rent a unit 10
Vacancy loss $1,471
Concessions* $824
Leasing staff time/cost $170
Marketing/advertising cost/rental (guides, newspaper, internet listing services, other advertising and marketing costs) $356
Resident referral fee / locator or fee (average) $444
Leasing commission $40
Carpeting cleaning or replacement cost $136
Painting cost $197
Appliance repairs or replacement cost $292
Miscellaneous maintenance costs (parts, etc.) $141
Maintenance staff time/cost $165
Apartment Clean $71
TOTAL $4,305
Source: SatisFacts Research (
* Source: Axiometrics (; average asking rent and concessions as of Feb 2010

As an illustration of the impact these costs can have on NOI and asset value, consider a 5000-unit portfolio that is able to reduce resident turnover by 5%.

  • 5,000 units x 5% lower turnover x $4,300/move-out = $1,075,000 increased NOI
  • NOI/ 8 cap rate = $13,437,500 increased value

Turnover presents a tremendous challenge for the industry. According to the NAA Annual Income and Expense survey, the average turnover rate over the last six years has ranged between 55%-62%.  For many industries, having to replace this volume of customers annually would make it nearly impossible to keep the doors open. Service and manufacturing businesses alike rely on repeat business.

In the multifamily industry, repeat business equates to lease renewals.  Our clients have experienced the impact of a greater focus: first year clients often reduce turnover by up to 6%; and, our clients’ average turnover is nearly 10 points below the rates reported in the NAA Annual Income and Expense Report.  The question becomes how does each member of the property team, including office and maintenance associates, personally impact resident retention on a daily basis?

Low/No Cost Best Practices to Reduce Turnover

An Internet search for resident retention ideas will typically result in suggestions of sending residents a birthday card, having a newsletter, throwing pizza parties, and delivering any number of trinkets as a way of expressing gratitude to the resident for choosing that community. After surveying millions of residents, however, there is no data to support that these tactics reduce turnover.

The data does provide very clear focal points that often cost nothing to the property management company but have a direct impact on a resident’s decision to renew their lease – and therefore protect NOI and asset value.  The renewal process begins at move-in and continues through each resident call and email, each work order that is completed and each personal interaction with a team member throughout the life of the residency.


It is critical to follow up with every move-in to ensure the resident’s new home is clean and that everything is functioning properly.  According to the SatisFacts Insite™ Index, 26% of new residents experience a non-working fixture or appliance.  First impressions are lasting, and from a resident’s perspective if they discover that basic expectations such as a working stove or bathroom lights working they immediately begin questioning their decision to make this community their home.  In fact, new residents who have an outstanding maintenance issue are one-quarter less likely to renew their lease compared with longer term residents with issues.

Maintenance teams can personally impact this first impression by implementing what Bill Nye refers to as the “look right” inspection process. The process requires the maintenance team member to enter the front door and follow the wall to the right checking every fixture, outlet, bulb, appliance, window, screen, window covering, lock, latch, door, counter top, etc.  Eventually the tech ends up back at the front door, with a thorough inspection completed and deficiencies can be remedied immediately.  While this may add time to the inspection process, it safeguards against new residents walking into problems and causing them to wish they had moved elsewhere. It also reduces the amount of rework the maintenance team will have to come back and do in the inevitable service requests.

Work Orders

It is critical to follow up on every completed work order to ensure it has been completed to the resident’s satisfaction. A SatisFacts correlation analysis reveals that this practice has the second greatest impact on renewal likelihood. Why?

High Priority Maintenance Satisfaction Topics SatisFacts


Maintenance: Follow-up by office staff 41%
Maintenance Staff: Request completed right the first time 80%
Maintenance: Maintenance problem still exists 26%
Score Key:

<3.00 = Red Flag, 3.00 – 3.49 = Warning, 3.50 – 3.99 = Average, 4.00 – 4.49 = Superior, 4.50 – 5.00 = Exceptional

Source: SatisFacts Research

According to the 2009 SatisFacts Index, only 80% of residents’ service requests are completed right the first time, and 26% of residents report a maintenance problem still exists. While some outstanding maintenance issues may be attributed to requests not completed right the first time, some issues may be ones that the resident has not reported. They may be minor issues such as a loose handle on a cupboard or a screen door that no longer slides open easily. Such issues are a daily irritant to the residents, but not severe enough today (in the resident’s mind) to warrant a formal service request. Regardless of the type of outstanding maintenance problem, part of the luxury of living in an apartment community is knowing that someone else is responsible for taking care of the home maintenance. When that luxury becomes a liability, the resident’s perception of value diminishes.  They then begin to wonder if they might have better service (and maintenance) down the road at the competing community – and then they get their renewal letter!

By following up on every completed work order, each office staff team member then ensures the request was completed to the resident’s expectations and also ask, “Is there anything else we can take care of for you?”  This will often prompt the resident to remember some of those “little things” that have been bothering them. While up seven points from the prior year, the current reality is that only 41% of residents receive any kind of follow up.  This means nearly 60% of residents may potentially be stewing about the perceived “bad job” done or “poor condition” of a home for which they are paying hard earned money. Follow-up effort by follow-up effort, value is enhanced when residents can feel confident that their maintenance issues will be resolved effectively and efficiently. And if they are not, they can at least be confident the issues will be quickly and easily resolved when they receive their standard service request follow up call, email or survey.


Nobody wants to have to work hard to be a customer.  There is nothing more frustrating when a resident has to continue to check in as the staff is not responding to calls and emails.  Therefore, establish a standard that all residents receive a same-day response to any call or email.

The previously noted SatisFacts correlation analysis identified “Prompt response to calls and emails” as the topic that has the greatest impact on renewal likelihood. The issue is not when you are responsive, it’s when you are not.  The last thing any owner needs is for residents leaving because the staff is not delivering the courtesy of responding!  While many property management companies already place this as a priority, the SatisFacts Insite™ Index for the Move-In, Work Order and Pre-Renewal feedback modules clearly shows a negative trend of perceived responsiveness after the initial move-in experience.

This common sentiment is summarized best in this quote from a SatisFacts Annual Resident Satisfaction Survey, “The staff has not been trained in customer service. Only in sales. Once you sign a lease they are unresponsive and indifferent to their customers.”

When asked at specific touch points how satisfied they were with the responsiveness of the office staff, residents responded with the following, with the score dropping over time – from move-in through the term of the lease.  The great news is that once staffs realize how critical responsiveness is…satisfaction and renewal likelihood scores grow, as supported by trends in survey scores.

How satisfied are you with the responsiveness of the office staff? Insite ™ Index
Insite ™ Move In touchpoint 4.40
Insite ™ Work Order touchpoint 4.34
Insite ™ Pre-Renewal touchpoint 3.61
Score Key:

<3.00 = Red Flag, 3.00 – 3.49 = Warning, 3.50 – 3.99 = Average, 4.00 – 4.49 = Superior, 4.50 – 5.00 = Exceptional

Source: SatisFacts Research

Prospects who have experienced prompt call backs or email responses from their leasing consultant are often surprised to have a markedly different experience once they move in. As they continue their residency, the trend appears to support the perception of residents that the staff is more focused on getting new residents in the door than serving their residents who have already signed the lease.

The office staff can personally change that perception by ensuring that they respond to all resident calls and emails on the same day received.  Even if the resident has asked a question, and the answer isn’t available yet, enormous goodwill is created when the team member returns the call or email to say, “I just wanted to let you know we are still looking into your concern, and we’ll give you a call as soon as we have an answer. I didn’t want you to feel that we’ve forgotten about you!”

The Resulting Impact on NOI and Asset Value

Because of the significant impact reducing costly turnover can have on NOI and asset value, it is critical for property owners and managers to support a focus on service delivery and communication, and make retention at least as important as leasing. Individual team members create the resident experience, and their commitment to service basics throughout the entire resident life cycle has a direct impact on the financial solvency of not only their own property, but the entire company.

The good news is that as each team member implements basic follow-up and response-oriented strategies as a daily standard, turnover will be reduced and owners will be able to see bottom line proof that NOI is being protected and asset value maximized.  Our years of reviewing client performance metrics validate this.

* Definition Source: RealData (

Join multifamily’s resident satisfaction and retention authorities, Doug Miller and Jen Piccotti of SatisFacts.  The absolute most effective thing you can do to keep your efforts on track is to safeguard your most valuable investment: the customers you already have. Given the high cost of turnover and that the majority of turnover is controllable (yes, it is!), that’s why we’ve devoted an entire show to just this aspect of the way we do business today. In each episode, you’ll hear more about what drives retention and learn about best practices that will  improve resident satisfaction and keep them renewing!

Third Thursday of each month

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Doug Miller
Since the mid 1980s Doug Miller, President of SatisFacts Research, has been involved with the marketing, research and training functions for thousands of properties nationwide.  Prior to starting his own businesses in 1996, Miller was Director of Marketing for several national and regional property management firms including NMHC Top 50 Forest City Residential.  Doug is the multifamily industry’s leading authority on resident satisfaction research  and retention – surveying millions of residents over the years to determine what best practices drive satisfaction and retention…and how to use this information to reduce controllable turnover.  Miller received his BSBA from Washington University/St. Louis and MBA from The American University (DC).

MultifamilyproTV Jen Piccotti
VP – Consulting Services Group, has over a decade of resident loyalty and process efficiency experience.  A noted author and keynote speaker in the multifamily industry, she has served as chair of the Service Quality Division for the American Society for Quality (ASQ), and has been MC for their Annual Service Quality Conference for several years running.  Previously, Jen was Quality Manager for a privately held property management company in Southern California where she oversaw the quality assurance program, including loyalty programs, work-time studies, process improvement initiatives, QA training and organizational communication. Jen received her undergraduate degree from Boise State, and holds a Master of Science – Quality Assurance from California State University, Dominguez Hills.

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