The Demand Solutions Blog

What Multifamily Gets Wrong About Renovation Pricing

Posted by Donald Davidoff on Feb 20, 2020 9:27:09 AM

RenovationPricingMFH-1(This is the third blog in our current series on amenity pricing)

It’s a classic conversation that will be familiar to every revenue manager who has ever had rehab units in their portfolio:

Property Manager: “I need to lower my one-bedroom prices”

Revenue Manager: “Ok. What, exactly, makes you feel that way?

Property Manager: “I’ve got a few units that have been sitting vacant too long”

Revenue Manager: “Anything those units share in common?

Property Manager: “Yeah, they’re the units we’re doing the rehab on.

Revenue Manager: “Ok. Then we really need to reduce the upcharge for the renovation on those units, not reduce the price on all 1-bedroom units”

Property Manager: “I can’t do that!” “Then I won’t get the ROI I need on those rehabs!!”

We have told that story many times, and every time we tell it to a revenue manager (or group of revenue managers), we get that immediate, knowing smile.  Yet despite this familiarity, this script keeps repeating itself. Why? And what can we do about it?

The Multifamily Renovations Mindset

Let’s tackle the first question before moving on to the second. Renovations are obviously an important part of our industry and its ability to deliver returns.  And what community manager doesn’t feel good about renovations happening at their community? 

That is what introduces a bias into the process - we naturally want to find ways to justify renovations. Add to that the fact that the company invested a lot in deciding to do the renovations, and it’s equally likely there are other stakeholders emotionally invested in the project—asset managers, construction managers, etc.

In a good way, this team of people wants to measure the impact of the renovation with a particular interest in “proving” the ROI. The simplest way to define the value of a renovation is to put an upcharge, usually through a renovation amenity premium in the property management system. Relate that additional rent to the cost of the renovations, and it’s easy to calculate an ROI (that may not be as easy you think - we will show you why in the next blog in this series).

The challenge with this approach is that it only works if the renovation premium truly isolates the value of the renovation. As the example at the beginning of this blog shows, if the lack of leasing renovated homes results in a lowering the base rent of ALL the homes in that unit type, then the economic impact is actually worse than lowering the renovation amenity value.

So what can we do about it?

The short answer is to be objective.  There are two very important dimensions to getting this right:

1. Measure renovations’ performance correctly. The “gold standard” is to compare how quickly renovated homes are leasing compared to non-renovated homes. Often this is done as a “test” until enough data is collected to be confident in moving forward with renovating all homes on turn. If the business plan is to forego such testing by renovating all homes from the start, then compare leasing pace after renovations vs the prior leasing pace, adjusting for any difference in seasonality. It’s obviously not as good as a real-time comparison test, but it still provides some useful insight into how the market is responding to the renovation charges.

2. Be willing to “kill your young.” If the data shows the renovations are not commanding the premiums being charged, then lower the premium. If that results in no longer receiving a sufficient ROI to justify the renovations, then end the project. The alternative, keeping the “upcharge” sufficient while lowering the overall base rent (or worse, lowering occupancy) may make associates feel good about the renovation project, but it doesn’t mean the real return is there. 

The essence of good decision making is saying “no” based on data even when emotionally we want to say “yes”

If you have renovations in your portfolio (or plan to in the future), what is your measurement process? And do you have the courage to terminate under-performing projects when the leasing data says you are not getting a reasonable return, no matter how much you want the projects to proceed?  We will return to this topic in future posts in this series - subscribe to our blog to learn more!

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Photo by Jelleke Vanooteghem on Unsplash

Topics: Leasing Performance