How to Realistically Budget Rent Growth This Year
by Donald Davidoff | July 28, 2016
As we roll through the “dog days of summer,” my thoughts turn to two things:
1. Upcoming pennant races - my Baltimore Orioles, while somewhat inconsistent, are at least relevant again.
2. Every multifamily executive’s (and associate’s) favorite activity - budgets (hopefully the dripping sarcasm is evident).
This year is a particularly interesting year for budgeting. After 5+ years of a multifamily bull run, 2017 will almost surely not be as good as 2016. Major data companies report YOY rent increases dropping to 3.5% vs more than 5% just a few months ago. Public companies like EQR have revised guidance downwards based on softening rent growth, and reports on new builds seem to indicate an increase in deliveries in 2017 rather than a corresponding decrease.
But are things really that bad? If you’d fallen asleep in 2005, woke up in 2016 and I told you rent growth was 3.5%, you’d probably feel pretty good about it since it’s above the long-term historical average. Yes, there’s a lot of building but it still hasn’t really caught up with pent up demand from the lack of new construction in the immediate aftermath of the Great Recession; and unemployment is currently below 5%.
So what’s a multifamily executive to do? Despite the positive ways to interpret the various statistics, I think it’s obvious that a) things aren’t as good as they were the past few years, and b) there’s a lot more downside risk than upside right now.
With these facts in mind, are your teams ready for tougher sales environments and less pricing power? With 30+% turnover of leasing associates and 20+% for community managers, most of your team probably didn’t experience the last downturn. They’re used to, dare I say complacent about, high occupancy and strong rent growth because of how easy it’s been the past 3+ years.
To me, it’s good to take a deep breath, relax and then think about what kinds of actions make the most sense whether rent growth stays moderate (say 2-3%) or actually turns flat to negative. Here’s my first cut at a list of questions to answer to make sure your demand management platform is sufficient to handle the coming challenges:
1. Make sure you budget realistically.
Don’t get over your skis by budgeting rent growth too high or by ignoring the realities of occupancy and rent pressure in the 4th and 1st quarters. I still see too many companies budgeting for flat or slight growth in the low season which rarely materializes.
2. Examine your marketing strategies.
Do you understand the actual cost per lead and cost per lease of each channel? Do you have specific strategies for incremental lead generation when you need it? Are your reputation management processes strong so your communities will be preferred when constrained supply no longer impacts prospects’ choices?
3. How good are your associates at selling?
I don’t mean at being nice and taking orders. I mean how good are they at truly establishing trust and rapport. Does your sales model address the realities of the Zero Moment of Truth or do they still pretend prospects need to rely on you for information? Do your associates understand the prospect's buying journey and how to connect authentically? And finally, do they make constructive advances when they follow up with prospects or are they just “dialing for dollars?” Now is the time to invest in call centers to answer 100% of the calls and new CRM systems to make sure follow up is strong.
4. Is your pricing system configured correctly?
Does your pricing team have a plan in place for dealing with softening markets?
5. How about renewals?
In soft times, more revenue growth comes from renewals than from new leases. And of course each renewal is one less unit of pressure on new leasing. I recently presented a webinar for Multi-family Insiders on the 13 most common objections at renewal time and how to deal with them. Are you teaching your teams how to handle all of these?
The bottom line is that if challenging times are coming soon, then you’ll be ready; and if the bull market continues longer than expected, you’ll perform that much better!