Definition
Lease rollover refers to what happens when existing leases expire: tenants may renew, vacate, or renegotiate terms, and the space is then re-leased at current market conditions. Rollover is both a risk (income disruption and leasing costs) and an opportunity (raising below-market rents).
Why It Matters
A property’s cash flow is only as stable as its lease expirations. Concentrated rollover (many leases expiring in the same window) can create a “cash-flow cliff†where occupancy and NOI fall at the same time. Spread-out expirations generally reduce volatility and make underwriting more durable.
What Investors Analyze
- Expiration schedule: which leases roll in each month/quarter/year.
- In-place vs. market rent: whether rollover likely creates rent growth (or rent loss).
- Renewal probability: tenant quality, unit type demand, resident satisfaction, competitive set.
- Downtime and turn costs: vacancy loss, make-ready/renovation costs, and time to re-lease.
- Leasing costs: concessions, commissions (more common in commercial), and marketing spend.
- Financing impact: DSCR sensitivity if rollover hits during rate resets or loan maturity.
How It’s Modeled in Underwriting
Rollover analysis is often summarized as a lease rollover schedule (or “lease expiration scheduleâ€) showing what percent of income (or units) expires in each period. Underwriting then applies assumptions for:
- Renewal rate (what percent of tenants stay)
- Downtime (how long vacated units stay empty)
- Rent reset (new rent vs. in-place rent)
- Turn / make-ready cost per move-out
- Concessions (free rent, discounts) if needed to maintain velocity
Example
Suppose a 100-unit property has 35 leases expiring between May and July. If renewal rates drop or competitors offer concessions, the property could see a short-term spike in vacancy and lower NOI. However, if the expiring units are below market, successful rollover can reset rents upward and increase cash flow once units are re-leased.
Common Pitfalls
- Ignoring concentration: too many expirations in one period increases volatility.
- Assuming market rent is instantly achievable: rent growth may require time, capex, or concessions.
- Underwriting “perfect renewalsâ€: renewal rates change with management quality and competition.
- Forgetting operational constraints: renovations and turns require labor capacity and scheduling.
- Missing seasonality: leasing velocity often differs by month; timing affects downtime and concessions.