The Demand Solutions Blog

Winter is Coming - 6 Areas for Multifamily Operators to Review

by Donald Davidoff | Apr 21, 2016 12:00:00 AM

Winter is Coming - 6 Areas for Multifamily Operators to ReviewWith HBO about to premier my favorite currently running series, Game of ThronesI couldn’t help but see many signs of that show's catchphrase in recent pronouncements from various media, that absorption rates are now below new delivery rates, thus likely driving moderation in occupancy and rent growth in many markets.

Winter is indeed coming.

Unlike the never-ending contest between the Lannisters and the Starks, we in multifamily can step away from the battle and prepare to face the Windwalkers of the next recession. Here’s my checklist for just a few areas in demand management to review for any sophisticated multifamily operator: 

1. Pricing and revenue management
  • If you haven’t adopted formal pricing and revenue management software, then you should. The vast majority of the NMHC top 50 have adopted it, and there’s good reason for it. I’ve never seen a properly constructed test (i.e. pre-selected test properties versus pre-selected control properties) fail, and I’ve personally witnessed more than a dozen involving well over 120 communities in total. And if you are using a system, have you critically analyzed your system and your execution? For example:

    • How many recommendations are being over-ridden? More than 10% is a strong indication something is wrong with your software, its setup or your team’s use of it.

    • How many leases are “non-compliant?” Same rule…more than 10% is a red flag.

    • How volatile are the price recommendations? Changes more than 1-2% happening more than 5% of the time are simply too many. Our business moves slowly, and it’s very rare that the value of a unit changes that much overnight.

    • How well does your system handle seasonality, the notion of lead times between visit, application and move-in, lease expiration management and forecasting early terminations?

    • Does your system ever suggest counter-intuitive pricing? Price optimization is very complex. If every answer is intuitively correct, it’s almost surely not optimal.

    • Do you have a plan for dealing with longstanding vacants that is more sophisticated than simply reducing the price?


2. Marketing
  • A strong, analytically-driven marketing platform can help sustain you when everyone is scrounging for “food” (i.e. leads and leases) in the proverbial winter. Here’s a few things to think about:

    • Do you know what a lead is worth? If not, how can you really decide which sources are worth investing in?

    • Do you know how many leads translate to visits, how many visits turn into applications and how many applications turn into MIs? If you do, you can easily back into exactly what you need to produce in order to hit desired occupancy benchmarks; if you don’t, you’re driving by looking in the rearview mirror by looking at only leases.

    • What do you do with leads that haven’t yet leased? I continue to be amazed at how few companies in our industry use email re-marketing campaigns. It costs $10, $15 or sometimes even $100 or more to get a lead, yet it costs a couple or three pennies per email to nurture those leads in a drip campaign. If you’re not doing that, you really have to ask yourself why.

3. Sales Performance

  • This is perhaps the least advanced piece of the entire multifamily demand management platform. I’ve heard many C-suite execs pine for a day when leasing associates “would just close better.” They implore their teams to build stronger relationships with prospects. But this simply won’t work. The simple fact is that, in a Zero Moment of Truth (ZMOT) world, the old ways don’t work the same way they did (if they ever really worked before). We need a change in kind, not degree, in our approach to teaching and executing leases. Sure, we’ll lease if we don’t change; we can’t help it…people need housing, and even in a recession, supply is more aligned with demand than any other vertical. But, we’ll lease much better if we align with contemporary buying behaviors. Even improvement as small as 50-100bps better occupancy or rent growth on a 5-7% cap rate creates tremendous value. If you’ll be at NAA, come listen to how one operator substantially improved their sales performance taking the need for change to heart.

4. Call Centers

  • I wasn’t originally a fan of call centers. I thought, of course our team can handle calls on site better than some distant person in a distant center. Even the realization that 14% of our calls came after hours plus many came while leasing associates were touring didn’t convince me. And then I ran a test. Test properties revenue growth exceeded pre-selected control properties by 150bps! And the results were validated by Bain!! And I was sold!!! I’m not asking you to take my word. Test it yourself…can you afford to ignore a possible 150bps gain? I know you’re busy, and you have many other projects. If all of those projects promise 150bps or greater revenue gain, then absolutely delay; but if any of them drive a lower return, then maybe you should slot this test in one of those projects’ place.

5. Renewals

  • More than half of your rent roll comes from renewal leases yet I’ll wager you spend much less time and attention on renewals than on new leases.

    • Do you still run your renewals as a direct mail (or email) campaign?

    • Can you articulate to your team exactly what your renewal strategy is? You’d be surprised (or maybe not) how often I interview regional operators and find that senior leadership really hasn’t communicated a clear strategy. The natural and logical consequence being that everyone just muddles through with results that are not surprisingly unimpressive.

    • Lastly, how does your team handle negotiations around renewal rates? It’s easy to “hold the line” when times are good, but remember, “Winter is coming.” You will face increasing instances of inverted markets, so now is the time to put the policies, procedures and tools in place to equip your team to handle those situations with grace and effectiveness.

6. Business intelligence (BI)

  • As I’ve written before, most operators go about BI decisions backwards. Good BI practices, like preparing for winter, require significant upfront work . Everyone can do well when the rising tide lifts all boats, but those who have easy access to actionable data will really see their investments pay off when the business environment cools down. It’s easy to delay, but rewards are there for those who prepare. 

I’m not trying to be a “Debbie Downer,” but rather just pointing out that bull runs never last forever. So there’s little harm, and great potential payoff, in preparing for the coming change in business season. In closing, I’ll refer to the catchphrase of my favorite series of all time. As Sgt. Phil Esterhaus would say at the end of every morning briefing on Hill Street Blues, “Let’s be careful out there!” 

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