by Donald Davidoff | Feb 2, 2015 12:00:00 AM
It’s not unusual when I’m at an industry conference (like the NMHC conference two weeks ago) that people are surprised by my answer to the question, “So what are you up to these days.” The surprise comes when I mention the work we’re doing to transform the multifamily sales model.
The response I get typically sounds something like, “Wow, that’s interesting. I just figured you were still doing pricing.” Often they seem relieved when I reinforce that I’m still (very) actively involved in multifamily pricing and revenue management, but that I’m also doing some other things.
I point this out because it highlights one of the challenges this industry is facing. Virtually everyone acknowledges that, given that prospects shop and buy very differently than 15-20 years ago, their reliance on a traditional approach to sales is flawed. Yet very few are actually putting any resources or effort behind actually changing things.
They’ll invest hundreds of thousands into revenue management solutions (as they should), invest in new analytical capabilities and continue to make smart development and re-development investments, yet they still look at sales as just an execution or at most “tweak the training” issue. To those who think of it as a recruiting issue, I remind you that we don’t pay our salespeople enough to recruit a truly different quality of sales associate.
How we sell is a major contributor to our revenue management approach. That’s a major reason I’ve decided to focus on multifamily sales as part of D2 Demand. As I’ve said to anyone willing to listen, multifamily is one of the few industries that operates in a truly constrained supply environment. In such an environment traditional rules of sales don’t apply (like increasing closing rates is always a good thing). How we sell has a dramatic (and highly leveraged) impact on how we can price our apartments. When demand increases we gain greater pricing control, and as we all know every increased dollar of rent we get goes directly to the bottom line (and every dollar we fail to get comes off of it). And at 5-6% cap rates, each dollar of NOI is worth $16-20 of enterprise value.
Think about this for a moment, what would you do to increase the demand at your property by 5%? What about 10%? You’d probably be willing to do quite a bit. Such an increase would typically lead to an increase of 1-2% in rents. On a 250-unit community at an average $1,000 rent, the low end would be a $30,000 a year increase in NOI with a corresponding HALF A MILLION DOLLAR increase in the value of the community.
The problem is that we often think demand is something we can’t control. But the truth is that we can, on a relative basis.
I learned this first hand when I ran marketing at ArchstoneSmith. In a controlled-A/B test we conducted with 20 communities on a call center vs an equal number of pre-selected control communities not on the call center, we found that revenue per unit (RPU) went up 150bps with essentially no change in occupancy (in fact, the test communities did slightly worse than controls on occupancy). All of the lift was in rent—just by having more leads to work with the same salespeople.
The same math applies to your sales efforts. If you do a better job of selling with your existing leads, then occupancy will start to rise. With a good revenue management system, you’ll actually see your closing rate decline as the system increases rents. But those increased rents are the ROI for the improved sales execution.
If you believe that prospects now shop very differently than they used to, then you have to act not just merely to change behaviors of your salespeople, but rather to transform your sales model to align with how buyers buy, and drive true NOI improvement throughout the process.
If you’d like to learn more effective sales in the multifamily industry, please download my white paper on this subject.