I don’t know if this will mark a turning point in the legislative fever sweeping the nation, but I couldn’t be more proud of my home state governor, Jared Polis, of Colorado. In the face of pressure from the populist, progressive wing of his own Democratic party and advocates who refuse to follow the facts when it comes to housing affordability (particularly the American Economic Liberties Project), Governor Polis vetoed Colorado House Bill 1004.
More important than the veto itself is the rationale he stated behind it. While expressing strong reservations about the potential for price fixing amongst landlords, he noted that such behavior would already be illegal under current law, and we should allow that process to play out. And for the first time, I’ve seen a governor discuss the downside of over-reaching, populist legislation when he wrote,
Reducing market friction through legitimate means that do not entail collusion is good for both renters and landlords…We should not inadvertently take a tool off the table that could identify vacancies and provide consumers with meaningful data to help efficiently manage residential real estate to ensure people can access housing.
For once, a wiser head is prevailing. For all of the anecdotal quotes about the impacts of revenue management algorithms, the data is clear. Rather than “saving” units for higher rents as the now-famous ProPublica article and the Tennessee lawsuit allege, algorithmic pricing actually does a better job of using price to allocate supply to demand. Average occupancies are up a full point since these systems became ubiquitous among the NMHC Top 50 versus before.
Contrary to the editorial and political narrative in the various lawsuits and proposed legislation, revenue management systems are not designed to raise rents. They are designed to balance supply and demand to optimize revenue subject to each owner’s independent strategy decisions. It is certainly true that rents go up more than down, but that’s due to the decades-long shortage of supply. When supply exceeds demand, these systems will lower prices just as quickly and dispassionately as they raise them. Just look to Austin and Denver this past year for proof of that.
Even with this victory, it’s important to keep things in perspective. The advocates arrayed against the industry, particularly AELP, are well-funded and won’t stop. There’s a strong risk of continued legislative pressure as well as the risk of rent control rendering all this moot by neutering landlords’ ability to increase rents beyond anemic, government-decreed amounts.
And in a spin-free world, interested parties will note this win in Colorado has no impact whatsoever on the slew of lawsuits still faced by legacy revenue management systems. These include the public plaintiffs consolidated lawsuit in Tennessee, the DOJ civil complaint and complaints filed by the District of Columbia and New Jersey (with likely more to follow).
Cutting through all the noise and propaganda, here’s what we believe multifamily companies need, and need not, do
- Do advocate to local and federal legislators the real reasons behind the housing affordability crisis: lack of supply. Banning software won’t change operators’ profit motives. It will just make the market less efficient to the detriment of renters (as noted earlier, occupancies are HIGHER post-revenue management than pre-).
- Do support the efforts of NMHC, NAA and the Housing Solutions Coalition, especially their efforts to combat rent control.
- Do choose a revenue management solution that follows what the TN plaintiffs and DOJ have already shown is acceptable. Through AvalonBay’s release from the former and the proposed settlement with Cortland for the latter, the key is to be sure that your revenue management solution does not use non-public competitor data and that your solution provider contractually commits to not sharing (bonus points for indemnifying you against any violation of that commitment).
- Do future-proof yourself w.r.t. potential legislation that could prohibit “sharing data among two or more owners” by choosing a revenue management solution that can be configured to limit such pooling of data. Note that this essentially eliminates all AI solutions since a single property’s data is not enough for an AI solution to give meaningful recommendations.
- Do choose a revenue management solution that allows you to configure it to fit your strategies--by market, sub-market, community and even pricing group (bed/bath count). It still floors me that executives pay for software solutions that their teams override 20, 40 even 60 percent of the time. If you have to override your revenue management system more than 3-7% of the time, either the software isn’t working or your teams are fighting it in ways that they should not. I wouldn’t want to pay 100% for something that’s only being used 50% of the time.
- Don’t go to the trouble and expense of trying to build your own. Software, especially highly specialized, math-driven software, always looks easier to build when creating a forward-looking project plan. After thirty-plus years of building multiple systems in multiple industries, I can tell you the reality is always much harder (and more expensive) than you think—often by a factor of 3-5X or more.
Returning to the initial premise of this blog, it’s great that at least one wise head prevailed in Colorado…but we have a lot more work to do going forward!
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