The Demand Solutions Blog

I often think of the economy as a metaphorical set of pipes with money (the "water") flowing through them. Recessions typically happen when the pipes "clog," causing the water to flow well below its normal pressure. Governments have to respond, taking actions to "unclog" those pipes to get the "water" flowing again.

But the recession I believe we've already entered is very different in kind, not just degree. The coronavirus pandemic has forced large sectors of our economy to close down, severely restricting consumption and economic activity. This time, the "pump" has broken. It may not matter how much anyone tries to unclog the pipes, as little will flow until the pump starts working again.

This metaphor has some significant ramifications for what we'll experience over the next few months (yes, months, not weeks). It feels like we will have a two-stage recession:

• Stage 1 will be unlike anything we've ever encountered before. This is the current stage, where the pump is frozen. Many industries will experience an inability to stimulate demand no matter what they do. For example, Las Vegas casinos are not allowed to do any business and thus can't even make an offer. Airlines can cut prices to practically zero, yet very few people will fly. Normal pricing and revenue management actions like lowering the price to boost occupancy simply won't work the way they typically might.
  
  
• Stage 2 will be more like a typical recession, where weak demand meets excess capacity until supply and demand rebalance. Government stimulus will drive investment and demand and slowly, but surely, the engine roars back to life. Whether this will be a "V shape" like typical recessions or a shape more like the balance sheet-driven "Great Recession" is hard for me to predict (I'm an engineer, not an econometrician). But whatever it will be and however long it takes, it will mark the process by which we get back to "normal."

As many of you will already be aware, we recently published the 2020 edition of our 20 for '20 white paper.  Just as we did a year ago, we sat down with another 20 senior executives to get their perspectives on the outlook for the immediate future. Of course, the interviews took place before the coronavirus disrupted our 2020 plans, but the findings tell us a lot about what companies are working on from a technology perspective. As we shall summarize in this post, the industry has experienced a significant year over year shift. 

In our new 2020 paper, we have identified a new set of trends and observations about current projects and priorities, some of which we will highlight on this blog in the coming weeks. But below, we will recap the five big findings from last year and see what's changed in the interim.

1. No more "One Big Project" dynamic

A year ago, we were struck by the number of respondents (a half) who reported having spent 2018 focusing on a single project that had dominated their year, effectively consuming all IT delivery capacity other than business as usual. Seven of the ten had been PMS switches or major upgrades, in itself an anomaly.

A couple of weeks ago, before coronavirus took over our attention, we learned some potentially important news about the short-term rental (STR) sector. The story was about Airbnb-backed Lyric's decision to reduce its workforce by 20% as part of a "downsizing and restructuring." We were disappointed to see a rising star in our industry falter on its growth path, but encouraged by the decisiveness of their action and hope that it will leave the company in better shape to capitalize on the opportunity that we know it has.  

The decision may tell us a couple of things about the state of STRs in the multifamily industry. Remember, Lyric was one of several STR platforms funded during a heady 18-month period from 2018 to 2019. With the staggering growth of Airbnb, the might of Booking.com (especially in Europe), and Expedia's commitment to becoming a force in this space, the STR industry and market have been thoroughly validated. So what's holding back the organizations who are trying, like Lyric, to define the STR business model for multifamily?

I’m writing this sitting on an airplane wondering whether this week will be the last week I travel for quite a while. As the level of fear (dare I say panic) continues to rise, we’re bombarded with exhortations to wash our hands frequently (easy to do), stop touching our face (virtually impossible, just try to do so for even 15 minutes) and dispense with handshakes, hugs and even standing within 6 feet of one another. While I keep telling myself (and I fervently believe) “This, too, shall pass,” I can’t help feeling a sense of anxiety driven by the uncertainty of it all.

To relax, I open up the latest edition of The Economist and as I read along, I come upon the “Schumpeter” column (Economist readers will recognize that as the regular column in the Business section).

Titled “Plan V,” the teaser copy says, “Covid-19 is foisting change on business. Some of it may be for the better.” One of the key elements of the article is about how companies are responding to the virus risk by encouraging (often requiring) that associates telecommute, in many cases as a “test” for contingency plans and in some cases (e.g. Seattle) as a strategy for arresting the pace of new cases. This dovetails with a story I heard on NPR driving to the airport discussing the same thing.

Both NPR and The Economist make the argument that this could be an unexpected, but possibly positive, long-term impact from the virus. The latter points out that British and American firms pay on average $5,000 per employee on rental costs despite only 40-50% of desks being used during working hours.  They suggest that employers may find an increase, or at least no dip, in productivity and thus change working patterns in perpetuity.

Where I come from (the UK), the English language is peppered with curious variations. One of the strangest is the perpetual controversy over the pronunciation of the word "scone." Everybody pronounces the vowel either as "own" or "on." Which side of the divide that people fall on follows no clear regional or socio-economic pattern. People adopt one pronunciation or the other and never change thereafter. And everybody is convinced that people who pronounce it the other way are entirely wrong to do so.

(This is the third blog in our current series on amenity pricing)

It’s a classic conversation that will be familiar to every revenue manager who has ever had rehab units in their portfolio:

Property Manager: “I need to lower my one-bedroom prices”

Revenue Manager: “Ok. What, exactly, makes you feel that way?

Property Manager: “I’ve got a few units that have been sitting vacant too long”

Revenue Manager: “Anything those units share in common?

Property Manager: “Yeah, they’re the units we’re doing the rehab on.

Revenue Manager: “Ok. Then we really need to reduce the upcharge for the renovation on those units, not reduce the price on all 1-bedroom units”

Property Manager: “I can’t do that!” “Then I won’t get the ROI I need on those rehabs!!”

We have told that story many times, and every time we tell it to a revenue manager (or group of revenue managers), we get that immediate, knowing smile.  Yet despite this familiarity, this script keeps repeating itself. Why? And what can we do about it?

A couple of months ago, I read a blog about multifamily sales. It caught my attention because the title referred to closing as "the bottom line." Those of you who read this blog frequently know that not only do we regularly write about how to improve sales performance, but we also do so from a contemporary point of view based on science and data behind successful sales/leasing.   

Our views are influenced by the seminal research by Matthew Dixon and Brent Adamson in the Challenger Sale, as well as anthropological research on how prospects actually buy. The hook (in the blog) of closing as the bottom line struck me as being completely out of sync with this modern approach. It was reminiscent of the "always be closing" approach that influences many people's idea of sales. This approach - brilliantly satirized in Glengarry Glen Ross - has been clearly debunked by Dixon and Adamson as well as other authors (e.g. Daniel Pink) in favor of much more prospect-centered approaches.

It’s not often that one finds oneself struggling to stay warm in Florida, but it’s been happening this week in Orlando, where we’ve been these last couple of days, along with a few thousand of our closest friends at the 2020 NMHC annual meeting.  

Among the gathered throng of multifamily dealmakers huddled (mostly indoors to avoid the cold) one could not help but notice a marked break from the previously mandatory uniform of grey pants, white shirt and blue blazer.  Many attendees commented on the degree of self-expression in the clothing (we’re talking blue, and even the occasional checkered, shirts) and the apparent disruption of a long-established order. But it was a different type of disruption that grabbed at least some of the attention this week.

About that tipping point

On Wednesday we were treated to a rapid-fire panel featuring luminaries of three technologies that have more potential than anything to transform multifamily operations. A succession of providers of AI leasing agents; smart home technologies and self-tour came to the stage to answer questions from operators.  The dialogue - although too quick to do much more than whet the appetite for further research and discussion - touched on some themes to which our industry should be paying attention.

As Rick Haughey (NMHC’s VP of Industry Technology Initiatives) reminded us at the start of the session, our industry has moved “from laggard to leader” in proptech.  A year ago in our 20 for ‘20 white paper, we noted that the industry was at a technology tipping point, largely because of those three technologies.  What’s impressive is the progress that has been made in 12 months.

Last week, we talked about how unit amenity pricing is the most common place to uncover hidden NOI in multifamily rental operations, and we covered the various reasons why amenity opportunities present themselves.

Unit amenities are a simple concept, at least in theory.  However, experience shows that the practice is a lot more challenging. So, let’s explore a few of the reasons that finding missing amenities is more difficult in practice than in theory.

1. It takes a concerted effort. Finding missing amenities is not like finding trash along the tour path. Associates must make must review and understand the configuration of the PMS and purposefully evaluate that against what they see in the property. It takes a combination of looking at site maps, Google maps and physically visiting buildings and units. It’s rare that one just stumbles upon the obvious.

I toyed with a “New year’s resolution” post, to welcome the new year, but as 2020 gets underway there’s something that we at D2 are really excited about. As multifamily housing operations specialists, we’re constantly looking for ways to eke out just a little more net operating income (NOI) for our clients. Can we get a few dollars more rent or reduce expenses by a few bucks? It’s a never-ending challenge, and anyone who’s been doing this for a few years knows how hard it is to keep finding those dollars.

But rather than the few bucks in expense savings, right now we’re preoccupied with the few hundred dollars a month that - for almost all multifamily communities - are just sitting there waiting to be plucked. Sounds too good to be true, doesn’t it? There simply can’t be a simple way to generate better NOI or we would have already done it, right?

After more than 20 years in the industry working with operators who manage more than 1.3 million units, we can tell you that if you are running multifamily properties you are probably sitting on at least a couple of hundred dollars a month (and maybe thousands) in incremental revenue.

The culprit? Drum roll, please…incomplete and/or inaccurate unit amenity configurations!