The K-Shaped Recovery: What it Means for Multifamily Pricing

When the recession first hit so quickly back in March, pundits naturally and immediately began to predict what would happen as the country navigated the crisis. We got introduced to a litany of alphabet metaphors. Would we have the "V-shaped" we all wanted? Or would it be more of a "U-shaped" one? What about the "L-shaped recovery we all feared?

As it has turned out, an alphabet metaphor has appeared to be appropriate, just not one of the ones that most people expected. It now seems clear that we are experiencing a "K-shaped" recovery, with growth for some and contraction for others. Various statistics have shown that high net worth individuals have grown their wealth in the past ten months, while those without significant assets have lost ground.  

Highly educated professionals are doing much better than those with less education who rely more on services for the jobs. The most stunning statistics I saw was that, by September, jobs over $32/hour were back above their pre-Covid numbers while jobs under $15 an hour were still down 40% from that period.  

What this means for rental housing

The K-shaped recovery appears to hold true the rental housing industry in many other ways. For example:

• Single-family rentals have substantially outperformed multifamily housing
• Secondary and tertiary markets are generally seeing growth where many primary markets are down
• Suburban communities are generally experiencing significantly more demand than urban
• A-class communities are doing much better than C-class when it comes to rent collections

This is truly different in kind, not just degree, from past recessions where the amount of decline and speed of recovery varied a bit, but the general shape was the same. I believe this has some profound implications for how executives and pricing managers navigate 2021. Here are just a few things to think about

Strategy is King

Most portfolios will straddle different segments of the K shape. So that puts a greater-than-normal premium on having the right strategy in place not just by market but at the sub-market level. While this may sound obvious, our experience is that very few owners or operators have written pricing strategies for each of their communities. When a rising tide is lifting all boats, there may only be a small penalty for this lack of clarity. However, when companies need to implement different strategies in different parts of their business, the costs for not having a clear strategy get much larger.

Communication

Creating a written pricing strategy is necessary for success, but unfortunately, it's not sufficient. Much like the proverbial tree falling in the woods with no one around to hear it, we can ask whether a strategy that hasn't been communicated with community-level teams is likely to be implemented. This one has a simple answer: it isn't! We still see too many cases where pricing teams and operators struggle with each other because they are each implicitly implementing different strategies. That disconnect is just a symptom; the cause has invariably been lack of clarity in communication coming from executives.

The Benefits of Revenue Management Systems (RMSs)

Challenging times play into one of the biggest benefits of using an automated pricing and revenue management system. Communicating explicit strategies by community empowers pricing teams to implement those strategies through the parameters your RMS allows them to change. Properly-configured RMSs ensure the execution of your strategy every day, not just when associates talk about pricing.

Importance of Data and Business Intelligence (BI)

Data is becoming more and more critical to multifamily operators. However, the K-shape recovery is accelerating the need for great business intelligence platforms. It's one thing when a single strategy and set of tactics will generally work across an entire portfolio. It's a completely different, and more difficult, thing when different markets need different strategies and tactics. It is harder still when submarkets within a market need different approaches. Those operators with good BI platforms will recognize the difference more quickly, and their site-level teams will be wise in their choices and more nimble in their execution.

Staying on Top of Key Secondary Drivers

As we've discussed in other blogs, pricing is not the only driver of demand management. As individual sub-markets recover and availability comes down, it will be time to review screening criteria, hold times and other policy changes that were made due to the downturn. Similarly, it will be time to review unit amenities and rentable items. Those "extras" typically experienced significantly reduced value as we bottomed out, and they will rise in value faster than base rent as we come out of the bottom.

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 Robert Ruggiero on Unsplash