The Demand Solutions Blog

The "Downturn" Playbook - Your Questions Answered

Posted by Dom Beveridge on Apr 6, 2020 9:22:11 AM

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MF_Downturn_playbookLast week we ran a webinar where three of our experts shared their first-hand experiences of managing multifamily pricing through previous recessions. The session (a recording of which is available on our website) was well-attended and generated some great discussion. We answered some, but not all of the questions during the session.

We know that during times of great uncertainty like these, everybody is looking for answers: below, we have provided our responses to the questions arising from the webinar. We plan to continue to share learnings and insights as we work with our clients to manage through this downturn, so please share comments and additional questions and help us to keep the conversation going.

Q.You recommended flat renewal increases - does this apply to specific lease terms or to all lease terms?

A. The short answer is a short to a short or a long to a long (e.g., 12 months to 12 months). We'd add that you should consider lease expiration management (LEM): if there are shorter or longer terms that fit your expiration profile, you should price to encourage those. But in the current market conditions, if occupancy is beginning to drop (e.g., below 94%), don't fixate on your expiration profile. At low occupancy, if somebody wants a six-month lease, you should take it even if it isn't ideal for your profile.  

This is a good example of a place where a best practice (that we talked about in the webinar) can help you: we recommend having an individual reach out to residents for 1:1 renewal conversations. By having that conversation proactively, you can talk about things like lease term availability, and work with the resident to find a good solution.

Q. Do you recommend limiting lease term options (12 months only) for renewals and negotiate alternate terms case by case, or is it best to maintain more traditional lease term options?

A. The short answer is no. If you are maintaining good occupancy, then the normal LEM features of your RM software will continue to price correctly and help you continue to shape LEM. If you have low occupancy, then as per the former question, you want to take all the demand you can. Making it more difficult for someone to lease by not meeting their desired demand will likely cost more than you would gain.

Note: one helpful suggestion came from one of our viewers: "For specials, when offering a full month we've found that prorating the value over 6 months works well in that it's a great sales tool. It also doesn't affect renewals (both in rate and perception as the resident is used to paying market rent for months 7-12)."

Q. Should we consider reducing our marketing spend in the near term?

A. In general, we advocate against that. This is when you're going to need your marketing department the most.  As we discussed previously, we see the current downturn as a two-stage recession, and in Stage 1 it will be hard to stimulate demand, but we will really need marketing firing on all cylinders for Stage 2. That said, we do recommend reducing channels that are pure direct response (e.g., PPC), as the overall level of demand will be low through Stage 1. Test judiciously and be ready to resume quickly and effectively as we move to Stage 2.

During the previous recessions, we saw some companies cut staff to help contain costs. They paid for it in spades when the market began to recover, as competitors who retained their teams were ready to rebuild demand for their communities. 

Q. This feels like 9/11 and '08/'09 combined with a bit of Enron's collapse for Houston sprinkled on top. Do you have any prognostication on what lease-ups will do in markets that are already supply heavy?

A. During Stage 1 the options are limited for new lease-ups, largely because the opportunity for renewals is small. In the case of a lease-up that is more than six months old there may be an opportunity to offer lease extensions. Other than that, figure out virtual tours and coach up your team in how to do them - every new prospect will be precious for the next few weeks.

Q. Do you think the AI pricing models that are in beta will react more timely and accurately than us using more classic style revenue management tools? Should we push to beta them?

A. It's tempting to see AI as a silver bullet for all data-related challenges, and - as we noted in the webinar - current pricing models are not designed to predict the kinds of huge and rapid changes in demand that we see right now. But there is no good reason to think that AI would do any better. The immense power of AI comes from its ability to analyze vast data sets and identify sources of insight in places where humans might not even think of looking.  

The big problem right now is that demand has fallen precipitously, so there are even fewer data points than there were before. With so little data to analyze, this looks even less like an AI problem than it did before. As we mentioned during the presentation, now is not the right time to "trust the system," be it an AI solution or a conventional one. Understand the model that you're using, understand what it can and can't do, and be vigilant as we progress down the road to recovery.

Q. What happened to demand for 3-bedroom apartments during the last recession?

A. As we recall, it depended on the floor plan. In some markets where there were 2-bed dens and 3 beds, we found that 3 bed demand would funnel into the smaller floor plan. We generally saw more people fitting into less space. One word of caution: 3 beds usually demand extra caution with LEM, so you need to make a call on whether or not to abandon LEM principles.

3-bed demand is really tied to demographics: we have roommate situations, which we can expect to see more of as people try to spread the cost. But a lot of the demand comes from families, whose circumstances vary. In some cases a family may have downsized to a 3-bed for affordability reasons. If there is additional financial hardship, as we can expect to see in the coming weeks and months, demand for 3 bed floorplans may soften.

Q. You've mentioned in Stage 1 to avoid rent reductions. However, when neighboring comps are cutting rents and offer concessions, how do you avoid following in kind to remain competitive and capture traffic?

A. First, you have to ask if you really are in Stage 1 - e.g., ~90% reduction in demand? If you are, then you should stick to your guns - dropping price won't help you to stimulate demand, and it will only make your renewal conversations harder down the road. That's hard advice to follow as we want to do something. This is where you'll need to communicate frequently with the teams, who may otherwise grow frustrated with a perceived lack of drastic action.

You should also pay close attention to the progress of demand. As we move into Stage 2 (or if you're there now), the different plays that we talked about in the webinar will become viable (including intelligent rent reductions). As leasing activity starts to return you need to make sure your teams understand the plan and are ready to execute.

Q. Any advice for student cities? we aren't student housing specifically but have a number of properties in college towns and many of our leases run with the school year

A. We've always thought of student housing as a "cruise ship that leaves once a year." These properties are subject to the same Stage 1/Stage 2 phenomenon though demand is tied tightly to what the universities are doing. Donald's younger daughter is in a student housing community and still paying for rent while her stuff is there, and she's home. The key to student housing will be whether universities open for normal operations this coming fall. One "out of the box" idea for any building that will be empty if schools don't re-open is to reach out to civil authorities to possible repurpose the building as a temporary hospital. Several hotels have been doing that.

Q. Do you think the housing market will see foreclosures and create demand for multifamily. If so, when do you think we will feel this impact?

A. This is certainly a possibility, and we saw that in spades during the Great Recession. Conversely, we didn't see that in the 2002 recession, probably because the former was driven by house price over-valuation, thus allowing underwater owners to just walk away. In 2002, owners walking away would have lost equity in most cases. So I think this will depend on whether housing values drop and/or what level of mortgage or other financial support the federal government provides. The CARES Act certainly kicks that can down the road at least a couple of months (some hourly workers will make more with the normal state benefits plus the extra $600 weekly federal kicker than they made working).

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Photo by Marcos Luiz Photograph on Unsplash

 

Topics: Multifamily Trends, COVID-19 Downturn