The Return of Pricing Power, And What You Should Do With It
by Donald Davidoff | March 30, 2021
Spring is arriving, and revenue manager's thoughts typically turn not just to baseball but to sequential rent growth. Of course, this year is particularly uncertain given everyone's interest in how the COVID-19 crisis will affect us.
I'm going to be bold and say that "Yes, we are seeing a return of pricing power," and those who recognize this earlier than others will reap the benefit of that insight. Why am I so bullish? Let's look at some macro trends and then share some micro data we've been seeing.
Almost all of the macro trends are in our favor:
- Rent seasonality trends positive for at least the next 4+ months.
- Vaccine supply and distribution continue to accelerate.
- The Biden administration has increased its "first 100 days" target from 100 million doses to 200 million.
- According to Bloomberg, 143 million does have been given through March 28. We are averaging 2.71 million doses per day on a trailing 7-day basis. On current trajectory, that will rise to 3 million within the next 2-3 weeks.
- Roughly 94 million Americans have already received at least one dose as of March 28. That's 28.2% of the entire population (35.0% of the eligible population, i.e., 16 and older)
- This means about 49 million have been fully vaccinated
- Virtually all states have increased relaxed their rules, and the trends continue to move in that direction.
On the micro-data front, we recently asked participants in our weekly downturn roundtable to share how much their lease-over-lease rent growth has changed:
- Several operators (those in suburban markets) reported they are already seeing positive new lease trade-outs, with average growth in some portfolios approaching as high as 6%. (Note that single-family rental companies have been getting 10+% growth in many markets for the past year).
- Those with properties in urban markets (particularly the primary big coastal cities like NY and Northern California) are reporting single-digit negative lease trade-outs, up from the high teens and even high twenties negative trade outs of the fourth quarter.
- "Denominators" will continue to get easier in most markets for the next few months, particularly those urban markets. On trend, we expect those markets to turn positive as early as May.
Perhaps the biggest indicator of pricing power based on my experience going through two early recessions is that the gap between new and renewal rents has closed substantially in the past three months. Renewal rent growth always substantially outperforms new rent growth in recessionary times. Then, as new rents catch back up with renewal rents, pricing power returns.
So what does that mean forward-thinking operators should be doing?
- Attitude precedes outcome, so take time to share the positive data you have with your field teams. As we've discussed in blogs and webinars, humans tend to fight last quarter's battle.
- If you haven't already done so, change your pricing system parameters from the "occupancy defender" mode of 2020 to at least neutral settings for 2021. In suburban markets already seeing positive trade-outs, we should be changing to normal high season settings.
- Pay very close attention to renewal rents. Send smaller batches more frequently in order to have your offers ride the surge in new rents. Also, be circumspect in when and where you negotiate renewal rents. If new rents are already at or above your renewal offers, you can be confident that getting an NTV will lead to even higher rent when you re-lease the home.
Lastly, I’ll finish on a word of caution. While most of the trends are in the right direction, here’s a few things that could ruin the party:
- In the very short-term, I'm nervous that states and local governments are opening too quickly. New cases are up 9% nationwide in just the past week, and there's a very real risk we could be seeing the beginning of a 4th wave. Hopefully, the increased pace of vaccinations will temper this growth.
- New variants that evade or reduce the efficacy of the vaccines in play today are probably the biggest risk. However, fears over this possibility are no reason to avoid leaning in today. We recommend shifting attitudes and strategies to take advantage of the strong macro trends; we can always back off to more conservative strategies if and when new facts present themselves.
- Other economic challenges. There's a lot of uncertainty over exactly how the massive stimulus will affect our economy and how various industries will come back in fits and starts. Like new variants, those are best monitored rather than taking any specific action today.
- The last wildcard is the supply overhang from various eviction moratoria. Not only are these another thing to monitor, but they also are still likely some number of months away. And as they expire, it will take time for the courts and sheriffs to work through the backlog.
As always, very few things in business are clear-cut. There are always headwinds and tailwinds. On balance, it feels like the headwinds continue to subside, and the tailwinds are picking up. That's why we see a return of pricing power. Do you? And if so, what are you doing to leverage it?