by Donald Davidoff | Jan 6, 2021 12:00:00 AM
As we enter this year full of hope (knock on wood) that there's no way that 2021 won't be better than 2020, there's still a lot of uncertainty around. Uncertainty over slower-than-expected vaccine rollout, new strains of the virus that appear to transmit more readily and simply the mental fatigue from 10 months of COVID-related stress will make for a challenging first half of 2021.
While this will probably last longer than we hope, we are clearly in the "when, not if" stage of overcoming the public health crisis, which means we should already be planning for a change in economic conditions. Below we have identified five things we can do today to be prepared for a new beginning ahead of us, whether that ends up being April, June, August or later.
Start communicating with your teams now
Simply put, humans tend to solve last quarter's problems. Left to our own devices, we will realize the tipping point at least 2-3 months after it really occurs. There's a lot of good news to share and many reasons to be bullish. Conveying that sense of confidence will be (pardon the pun) infectious! If we explain to our teams why we're bullish and how they can see the signs that we're past the bottom, it will give them confidence. That confidence will positively impact both their own decision making and their communications with residents and prospects alike.
Understand how to implement strategy changes in your RMS
As we have said repeatedly since the start of this pandemic, changing market conditions call for careful management of revenue management system (RMS) parameters. As we move into recovery mode, you will need a strategy and a plan to implement it in your RMS.
With our clients we use a simple 2x2 matrix that maps out four quadrants based on high versus low season and growth versus recessionary market conditions. Each has its own "recipe card" for key RMS parameter settings and other related pricing policies (e.g., screening criteria, hold time management, marketing boosts, etc.). Operators who understand when and how to implement changes in their strategy through their RMS win big at cyclical inflection points. One of those key points is coming in the next 3-6 months, so now is the time to prepare.
Determine the criteria to change strategy
No one has a crystal ball and as noted earlier, these are particularly unpredictable times. Even in more stable times, strategy is inherently a bit of a bet on the future, so there's no pure science or math. But we do know that a) the inflection point will come in the next 3-6 months and 2) seasonality will be a boost over the next 6+ months. So determine what kind of traffic, availability and leasing velocity will drive you to move away from your very defensive posture of the past 10 months.
We also know that this is a K-shaped recovery. That means markets (even sub-markets) will shift at different times. Suburban communities will hit the inflection point before urban (some may have already hit that point). Tertiary markets may hit the point before secondary, and both will hit the point before primary markets. Higher-end communities will hit that point before lower-price point homes. Determining criteria now will ensure rational, scheduled decisions in the future.
Begin moving away from off-RMS concessions
It happens every recession (at least the three I've been through in this industry). We start using off-RMS concessions to "protect" the rent roll, both for renewal conversations and for valuation purposes. But when do we get away from those concessions?
It's a fairly tired refrain that concessions become the "crack cocaine" of leasing; but that doesn't make the line any less true. It will require substantial effort to take away this "easy button," so the sooner you start experimenting with doing so, the better.
Re-evaluate your renewal strategy
Spoiler alert: raise your renewal caps
This recession had a "social contract" component unlike any other. That's what led NMHC to recommend to members to forego any renewal rent increases at the start of the pandemic. It was the right thing to do at the time. Since then, most companies have started raising rents on renewal again, but our data shows that most are still maintaining very low caps (typically 3-5%).
Raising caps in inverted markets won't hurt--by definition, inverted markets won't hit any cap. Keeping low caps where rents are up enough to justify such increases won't actually change your renewal percentage. It will just give a lower rent to existing residents. We generally recommend caps no lower than 10%, but certainly not lower than 8%. Those increases will only go out where a resident's gap to market justifies the increase. They may not love the new rent, but they'll quickly see that moving to any comparable home will be just as high or higher.
Remember, renewal pricing is already out for March in most markets. April is just around the corner. Rents will almost certainly be higher then than now. So think ahead and use renewal rents to help reorient your teams' thinking.
Join us on January 14th for a 2021 pricing webinar
The advice above forms part of an overall strategy that should be in place at every multifamily property as we move through 2021. More than ever, you will need a revenue management strategy for the year and the discipline to implement it effectively. Join us on Thursday, January 14th at 1 pm Eastern for our webinar "The Revenue Manager's Gambit: How to play chess, not checkers in 2021."
Photo by Hakan Nural on Unsplash