COVID-19: Impact on Apartment Pricing (Webcast Summary)
To help our customers and the multifamily community as a whole through the current COVID-19 crisis, we’ve launched a series of discussions, COVID-19: Multifamily Impact and Performance Insights, centered around its impact on the rental housing industry with the latest data, expert insights and actionable measures stakeholders can take to minimize fallout.
Following is a condensed summary from the second webcast in the series, COVID-19: Impact on Apartment Pricing (broadcast on March 24), featuring NMHC President Doug Bibby with RealPage’s SVP Keith Dunkin, VP and Deputy Chief Economist Jay Parsons and Industry Principal for Asset Optimization solutions Andrew Bowen. It includes summarized responses to the Q&A with Doug, along with links to NMHC commentary and guidance related to the information he shared in the session.
Pricing in a Downturn
Many of today’s property managers and leasing agents weren’t in the industry back in 2008-2009, and they’ve experienced only strong 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 is 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.
What lessons learned from 2008-2009 can we apply to today in how we price units? Here are 10 takeaways from today’s webcast:
- 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 2008-2009, 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 that revenue-managed properties maintained higher occupancy rates and deployed strategies that enabled them to come out of the recession earlier. We have case studies we’re happy to share as reference.
- 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 2008-2009 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 and 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 levels you can pull out of toolbox that also includes marketing, screening and workforce optimization. Not every problem is a problem that price can solve.
We received dozens of great questions today from many of you who participated. Here are some of those questions along with responses from our team of experts.
- What can we do to protect our rent rolls in cities that have put in place moratoriums on evictions for delinquent renters?
We received a lot of questions around evictions. 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 also at actual willingness to pay rent.
- Are the revenue management models starting to discount pricing and reduce rents? If so, by how much on a percentage basis?
The models consider each floor plan they price completely independently of each other, so there is no ‘yes’ or ‘no’ answer to this question. It is important to remember that both tools consider supply and demand across the entirety for the floor plan group and do not consider just new leasing activity. We have definitely observed cases where new lease demand is slowing but the supply is being offset with stronger-than-anticipated renewal activity. In these cases, there is usually little movement in recommended price. Where we are seeing price recommendations to the downside is where the new lease demand is falling, and we are not seeing any uptick in the renewal activity. As to the specific recommendation, price elasticity is solved for independently for each floorplan group we price, so it is not appropriate to extrapolate across the platform.
- How are the demand forecasts being reset now that we know the demand the models anticipated, say, 10 days ago, are no longer going to be realized in the next 12 weeks? How do we know that the models aren't assuming there is demand that we rationally know isn't there?
The demand forecasts in both YieldStar® and LRO are updated with every new rate optimization. The relationship between total internal supply and total demand (renewal & new lease) is evaluated with every rate optimization – so just because new leasing activity has slowed, it does not necessarily mean that total demand has slowed. Definitely work with your Pricing Advisor/Revenue Manager to review your specific asset and its performance.
- If a property’s demographic is made up of tenants that work in higher risk industries (retail, restaurant, …), is it worth shortening the duration of renewal offers to be better situated for probable turnover?
In a situation where you believe your resident demographic base is highly susceptible to job loss and/or other economic pressures, whether you are renewing shorter or longer leases is really not relevant per se. We would recommend focusing on plans to work with your resident base to extend payment options (if possible and in ownership’s best interest) to ensure the residents that all who can economically remain, do. We would also recommend looking in your revenue management tool for guidance around the demand expected for each bedroom type in each month and position offers to meet those demand curves (these are visible in both LRO & YieldStar – your Pricing Advisor/Revenue Manager can guide you to the appropriate resource depending on your specific situation).
- Looking ahead to 2021, how will YieldStar adjust for the weak demand in 2020 to be able to determine the best pricing in 2021?
When leveraging historical performance, YieldStar has always taken a multi-year approach to trend analysis, allowing the tool to identify anomalies such as what we are currently experiencing. With that said, we will certainly be looking upon this period from a Data Science and modeling perspective in both tools and determine if any adjustments to the models moving forward are warranted. It is too early to make any determination towards that end yet, though.
- Can we get your thoughts on reducing prices versus offering concessions on the new lease side for drawing traffic and securing leases? What are the pros and cons to using concessions to help sustain your rent roll?
Whether or not you leverage concessions to bring down your net effective pricing really should come down to whether you fundamentally believe this downturn is a ‘blip’ that we will pull out of relatively quickly or a resetting of the marketplace. In an ideal world, Market Rent is our best prediction of where we believe the value of our asset sits within the marketplace. If your take on the current situation is that we will pull out relatively quickly, concessions would be an appropriate strategy. If, however, you feel that this will be more protracted (perhaps your resident demographic is heavily service industry-oriented, for example), we would recommend taking the Loss-to-Lease approach. The difference between the two approaches is largely in the perception of the valuation of the asset.
In this environment though, we believe you need to also consider the reputation side of the equation. The optics around having a current resident or prospect signing an agreement at a “Leased Rent” that is significantly higher than their effective rent should definitely be considered before moving forward with a concessionary strategy.
As it relates directly to revenue management – if you believe this is truly a short-term blip and are going to leverage concessions, be sure to work with your Revenue Manager and/or Pricing Advisor to configure the model appropriately. While it is not a typical practice to leverage concessions with revenue management, the platforms are able to do so, but there are definitive modeling implications that should be accounted for prior to doing so. Communication between Operations, Asset Management and Revenue Management is the key to managing this process effectively.
Conversation with NMHC President Doug Bibby
On Sunday, March 22, NMHC issued a bold and unprecedented statement endorsing 90-day moratoriums on renewal rent increases and on evictions related to delinquencies, among other measures. You can find that letter here. NMHC also provided guidance for apartment managers here and summarized their critical advocacy efforts in Washington, as well.