Pricing and Process Recommendations to Improve Renewal Performance

It’s been a while since I wrote a newsletter article exclusively on a pricing topic, so I thought I would do that today. Given the uncertainty in where rent growth is going (see last month’s newsletter), I thought it would be good to talk about renewals. As I’ve noted, many markets are seeing renewal rents higher than new rents (that’s one of the key indicators of a softening market as operators now lack the pricing power they recently enjoyed).

In many ways, renewals are more complex than new pricing:

• Residents have a sense of value anchored to the existing rent. Any increase feels like paying more without getting more.
  
  
• Residents have a history of service with site associates which may help or hinder a conversation about a rent increase.
  
  
• Site associates may have developed a personal relationship with a resident which makes it harder to deliver a rent increase.
  
  
• Unlike with new leasing prospects, a price must be quoted well in advance of when the resident needs to decide (or even consider their decision).

Here’s a few of the key pricing and process recommendations D2 Demand has from our many years working these issues with many clients:

• We continue to be surprised at how many operators still price renewals unit-by-unit and instead favor an algorithmic approach. Whether using your PRM software (preferably) or creating your own renewal pricing tool, an algorithmic approach:
  
  
  • Guarantees consistency and fairness
  • Ensures corporate strategies are adhered to
  • Avoids regional and site teams spending a tremendous amount of time on something they’re candidly not very good at. That time can instead be invested in things they are good at—developing their teams and serving residents and prospects
    
    
• When it comes to upfront concessions, experience has taught us that we usually can base renewal pricing off an “expiring rent” of the most recent month rather than the average rent (i.e. renewals from a 12-month lease at $1200 with one month free can be based on a $1200 expiring rent rather than $1100). Some residents may do the math and come to discuss (I know I would be one of those), but many do perceive their rent to be $1200. We have found it’s better to deal one-on-one with those who come to discuss while benefitting from those who don’t.
  
  
• In inverted markets, we find that operators can typically get a 1-2% rent increase even though their expiring rent is already above what a new lease rent would be. This holds true until rents go down enough that the general press reports how low rents are going. At this point, increase offers tend to upset residents to the point that some won’t even come to discuss. They just give notice.
  
  
• On the subject of capping rent increases, we find that the rate of renewal remains largely unchanged up until about a 10-12% increase (presuming, of course, that increases reflect market rents for new leases). So we recommend renewal increase caps, if any, should be 10% or higher, and certainly never below 8%.
  
  
• We’ve always been fascinated with the tendency for operators to send renewal notices out in monthly batches. Sure, it simplifies things; but it means many residents get a quote as much as 30 days further from their required notice date than others. That exacerbates the fact that rents can move up (in which case we lose rent) or down (in which case we increase the likelihood the resident will feel the offer is unfair) in the intervening time. Sending out bi-monthly, weekly or even daily renewal offers will materially improve on this. Perhaps more operators should encourage PMS vendors to make it easy to generate and send renewal offers tied more to the expiration date instead of in multi-day and multi-week batches?
  
  
• Don’t make renewals a direct mail campaign! We all know our associates do this, particularly if increases are high. They leave the letter under the door at 5 PM on Friday and hope residents have calmed down by Monday. Renewals should be treated as a sales process in the same way as new leases.
  
  
• Another key, and frequently ignored, best practice is to provide training on renewal conversations. Whether or not you allow site associates to negotiate, they should be trained on how to handle renewal conversations. Yet while most companies have formal new lease sales training classes, few have renewal sales training classes. If you want to improve renewal performance, this is probably the first place to start.
  
  
• Lastly, there’s the Shakespearean question, “To negotiate or not to negotiate….” While we recognize that some operators don’t allow sites to negotiate, we are firmly in the camp of allowing it. It’s a complex enough issue to be beyond the scope of a single bullet in this newsletter, but the short answer is that a) we don’t believe in risking the loss of a current resident just to re-lease at a lower rent and b) we strongly believe in providing the tools and training to guide site associates on when to negotiate and when to hold firm. We’ve seen this work enough times to be confident in the tools and process we recommend.

Renewals are always important, and they’re likely to become even more important in 2017 and 2018 given current market trends. If you’d like help on improving renewal performance, please give us a call. We’d love to talk about it!