COVID-19: Ten Best Practices for Pricing Apartments in a Downturn
Many of today’s property managers and leasing agents weren’t in the industry back in 2008 and 2009, and they’ve generally experienced only strong leasing demand over the last decade. They’ve now been thrown into the deep end of the pool very abruptly.
Measuring same-store change on a rolling seven-day average, traffic to property websites are down 15% year-over-year, and guest cards are down nearly 3%. Lead volumes will likely plummet further as more cities adopt shelter in place ordinances, and even after the virus runs its course, the economic fallout could translate to sustained job losses and weak demand for housing.
That’s a very challenging backdrop in which to think about pricing apartment units.
What lessons learned from 2008 and 2009 can we apply to today in how we price units today? Here are 10 best practices to consider:
- Avoid panic. It’s always important to take emotion out of pricing, and it’s even more important in a downturn. Build your pricing strategy with a balance of science and operational expertise. Protect your rent roll in ways that allow you to capitalize when markets improve. Simply slashing rents won’t necessarily buy you demand if that demand isn’t there.
- Revenue management outperforms in a down market. In 2008 and 2009, revenue-managed properties didn’t necessarily avoid rent cuts – few properties did. But those adjustments came earlier and were not nearly as deep as other properties. We also observed revenue-managed properties maintained higher occupancy rates and deployed strategies that enabled them to come out of the recession earlier. There are case studies available supporting those results.
- Revenue management is configurable to your strategy. Aligning your pricing strategy with investment strategy is critical. For example, NOI or cash flow versus focusing aggressively on rent level appreciation.
- Lock in renters on longer lease terms. Every asset is unique, but we saw many benefited in 2008 and 2009 from pushing longer lease terms to reduce churn and minimize vacancy.
- Work ahead. Send your renewal offers longer in advance than you would in a high-demand market. Operators who did this were successful in holding higher occupancy rates.
- Enter your data – and follow the data. Revenue management looks first and foremost at your internal rent roll from your property management system, which means it’s paramount to ensure data is updated frequently. Every lead, every lease and every renewal matters.
- Watch transactional market trends closely. Using solutions like RealPage Benchmarking, you can see what is happening around you in real time. Understanding how your competitors price renewals, for example, empowers you with critical decision support. Pay less attention to rent comps from call-arounds and web listings. These cover only new leases and rarely reflect what’s on the rent roll. One of the worst mistakes you can make is to follow your competitors off the ledge of the cliff when your internal data and your transactional benchmarks tell you there’s no need to do so.
- Get granular. Execute floor plan by floor plan. Don’t just think about the asset overall.
- View demand in aggregate – new leases plus renewals. An expected increase in renewal demand offsets a decrease in expected new lease demand.
- Avoid thinking about pricing in a vacuum. Pricing is one of many levers you can pull out of toolbox that also includes marketing, screening and workforce optimization. Not every problem is a problem price can solve.
One challenge apartment operators didn’t face in 2008 and 2009: eviction moratoriums. We have received many questions over the last week asking how apartment owners and operators can protect their rent rolls if they can’t evict delinquent renters. We have a commentary piece on our blog with deeper insights into that topic, which you can find here. We make the point that eviction bans make operational risk management crucial going forward – particularly in having smarter screening practices that look not only at ability to pay rent, but actual willingness to pay rent.
Going back to #10 on the list above, remember that pricing is only one of four primary levers you can pull to optimize revenue. In the coming days, we’ll talk more about how to weave together a cohesive strategy aligning each lever.