The Demand Solutions Blog

7 Reasons Why There Ain’t Nothing Like a Downturn

Posted by Donald Davidoff on Jul 30, 2019 12:07:11 PM

Downturn_MarketA few weeks ago, I wrote about some of the core skills of Pricing and Revenue Management (PRM) and how those skills have diminished in the industry talent pool during the last decade. As I explained - using Warren Buffett’s playful metaphor about tides and skinny-dipping - it’s relatively easy to deliver growth in a generally growing market. Skillful, difference-making PRM professionals are adept in delivering upside even in less favorable market conditions.

Nobody likes downturns, but having been in multifamily PRM for more than 20 years, I can attest to the stress-test that they impose on PRM capabilities and practitioners. If your pricing managers haven’t been pricing for at least 10 years, then they have never dealt with a softening market. That’s true whether they’re internal employees, associates of your third-party fee manager or serve on the staff on a pricing services team that is offered by your pricing software vendor.

Downturn-Ready = Opportunity-Ready

The lack of this crucial experience is an obvious risk as the current bull run ends and the inevitable downturn comes. Less obviously, though, the experience of preparing for and having experienced tough market conditions breeds PRM professionals who are adept at capitalizing on opportunities in both good times and bad.

If you haven’t thought about managing a downturn recently, it’s a great subject to discuss with your pricing managers, both to understand how they might prepare for a softer market, and to challenge their awareness in all market conditions. Here are seven questions I recommend asking today about what will happen when the market turns:

1. What changes will you make in parameter settings? Just as pricing strategies vary somewhat by seasonality, they usually vary when the business cycle changes. If your pricing team is not prepared (or worse is not aware of the changes needed) to make when the cycle shifts, you’ll end up scrambling to catch up to others who were more proactive.

2. Under what conditions should we offer longer-term leases? When markets turn, locking in leases for longer periods of time help defend occupancy and keep pricing pressure to a minimum. Of course, longer-term leases come with the opportunity cost from foregoing a future rent increase (or locking in a rent step-up that may be lower than market when due). Your pricing team should do the math to make recommendations on when to offer longer-term leases.

3. What does a downturn mean for our renewal strategy? If your pricing team doesn’t understand the real relationship between pricing and likelihood to renew, then our experience is that renewal increases will be overly conservative. Given that a) most rent rolls are 50% or more renewals and b) renewal rents can be a strong stabilizing force during downturns for overall rent growth, this may be the most important areas in which a pricing team can help.

4. How will we handle “inverted” leases? In down markets, it is inevitable that some leases will have expiring rents higher than new rents for the same home. A pricing team that has a well-thought-out strategy for initial offers and subsequent negotiating strategies outperform those that don’t. This is also a good time to ensure that you are giving your operating teams the tools they need to know when and how to negotiate (and equally importantly, when not to negotiate).

5. When was the last time we did a deep dive on our competitors (and are they still the appropriate comp set)? We often hear about how important it is to know the comp set, yet we almost equally as frequently find it’s been more than a year since the last deep dive on the comp set. While a bull market’s rising tide lifts all boats and you can get away with this lack of discipline; in a downturn, it can be a source of great challenge.

6. How does our expiration profile help or hurt us? A good expiration profile can mitigate the challenges of a declining market while a poor one exacerbates the problem more so than during a strong market. Good PRM teams routinely deliver updates on the expiration profile and recommend tactics for improving it.

7. What other policy changes could help us? Credit screening cutpoints, hold times, longstanding vacant protocols and price hold policies all affect demand management. PRM teams who are intimately involved with setting these policies outperform those who view them as “operations’ responsibility.”

The best revenue managers will recognize most of the above points as items on a regular checklist. Reviewing all of these indicators and parameter settings helps us to capitalize on opportunities in all market conditions. But since it’s been so long since the last downturn, many PRM teams haven’t recently thought of many (any?) of the above.  

Rather than waiting for the crisis, now is the time to make sure you have the right PRM support and that they have contingency plans that include all of these questions.

Floor Plans and Multifamily Revenue Management

Photo by Nathan Shipps on Unsplash

Topics: multi-family housing, Multifamily Trends, Future