Two Sides to the Revenue Management Pricing Coin
Nationally, there have been numerous headlines about how new-lease rent growth is moderating. But the truth is, there is always revenue to be made.
How, you might ask? There are two sides to the revenue generation pricing coin: the new-lease side and the renewal side. The latter is typically overlooked for the former. We all want to have great new-rate prices, but often the most significant impact in revenue resides on that renewal pricing side of the equation.
Renewals account, on average, for more than half of a multifamily community’s revenue. Renewal conversion rates have hovered above 50% since 2013. Replacing an existing rent with a higher rent without incurring vacancy, turn cost, marketing and leasing expenses yields higher revenue. Between vacancy loss, cleaning, maintenance and marketing costs, the price tag of a turn is high.
So why is it that renewal pricing takes the back seat to new-lease pricing when the revenue impact is greater?
A couple reasons have led to this oversight. Unit expirations pose a balancing act for operators. In order to solve this, you must maintain an appropriate level of resident retention to produce the right amount of supply from resident notices that will match the incoming prospect demand. Secondly, renewal pricing has historically been a black box, typically being more emotionally based, both of which are admirable and have legitimate reasons. One of the perceptions operators balance is reputation and market adherence as they produce renewal pricing. New-lease pricing has a lot of transparency – especially these days, when rate information is everywhere and market-level understanding is readily available. And historically, renewal rate benchmarking was not available – that is until RealPage provided the only market-available solution, Performance Analytics Benchmarking, that brought forth revenue and financial benchmarking even for renewals.
So, within these constraints, how does someone develop a renewal strategy that is real estate cycle agnostic?
It starts with developing a strategy that algorithmically based revenue management solutions to ensure revenue growth is the main outcome. Managing leases is dynamic and therefore numerous considerations are essential for maximizing revenue. The at the forefront of an effective revenue strategy include your asset strategy, seasonality, rent growth expectations and operation adherence.
An effective renewal strategy should first and foremost consider your overall asset strategy. Depending on where your asset strategy directs your goals for the assets, a renewal strategy should complement and enhance your overall goal. For example, if you are a value-add operator and your asset strategy includes turning all of your units for renovation within a two-year horizon, your renewal strategy will likely need to incorporate a lower level of overall retention so that you can effective turn multiple units per month.
Seasonality is an important element to consider and one that is often overlooked. Depending on your operation procedures for designing, sending and managing lease expirations, you are likely working across different leasing seasons and even shoulder seasons when designing offers. For example, if you currently require a 60-day notice to vacate, and send out renewal offers 90 days in advance, at any given point you are designing offers that branch a quarter of the year. In markets where leasing is more seasonal, this can mean that you could be designing renewal offers in one season for expirations that land in a completely different seasons. For example, right now you might be experiencing relatively positive seasonality on new leases in late summer and working renewals for expirations in early winter, like November. Now if you are utilizing RealPage revenue management software, these solutions are intelligent, understand seasonality changes and adjust renewal offers to be congruent with the expiration period seasonality. It is important to think strategically here as you reference your asset strategy and goals to ensure that you are incorporating seasonality into your strategy. To reference our value-add strategy above, likely with this strategy you would want to renovate units every month so you can turn more units annually, and therefore as the expiration pool increases or decreases based on seasonality adjustments you would want to ensure you receive the appropriate amount of notices to complete your renovation schedule while ensuring you have the appropriate demand seasonality to ensure your new renovation unit leases with minimal vacancy loss.
Rent growth expectations become the next item to consider. I have seen time after time a flat monthly growth expectation being budgeted, and while that creates a consistent and easily communicated strategy, rent growth is more dynamic than that and typically ebbs and flow throughout the year. If you take into account our first two considerations — asset strategy and seasonality — you need to think about your growth expectations as it relates. If you operate within a highly seasonal market, you may realize higher rent growth rates in peak seasonality months versus the slow season months. So, why would you want to budget for an expected growth inconsistent with your asset strategy and seasonality? Growth expectation should be congruent with your expiration profile and relative to the market and your rent roll. If you historically have a large number of expirations in 2nd quarter and 3rd quarter based on your seasonality, you may have units paying closer to market rates for these expirations than those units expiring in 1st quarter and 4th quarter that reside in a lower seasonality. As you consider growth expectations, look at your overall opportunity and where the greatest risk lies relative to your greatest opportunity across the year and adjust your expectations.
As you consider your overall asset strategy, seasonality influences and growth expectations, you must then put this into place operationally, enabling the adherence to your strategy. This is the hardest part.
You can setup a great strategy that takes into account all these things, but if you operational teams can’t put it into place, the rubber never hits the road. Rest assured that if you line up the above considerations with your operational procedures, this process maximizes revenue. The success here lies with clear communication and expectations of how your operational teams design, implement and manage the renewals. For starters, everyone needs to be on the same page and reading the same sheet of music regarding the offers being designed, how your sending them out and following up and how you are managing things like lead time of offers and negotiation guidelines. I have seen many renewal strategies fall flat and crumble at this point, but I have also seen great success with a well-oiled operations team that enhances and compliments all considerations.
In summary, enabling both sides of your revenue management pricing coin will ensure that revenue is effectively received from all revenue sources. I will always have a soft spot for the renewal side of the pricing coin as I see more upside there, especially as we all look for more ways to generate revenue as market growth projections lower.