Budget Season Is Over. So Why Are We Already Setting Ourselves Up to Fail Next Year?

We're past the budget cycle now. Spreadsheets have been blessed, NOI targets have been handed down and everyone is heads-down trying to execute. Which is exactly why this is the right moment to reflect on what just happened. Not to relitigate the numbers, but to ask an honest question: did we build a budget we can meet, or did we merely mollify key stakeholders with a story they wanted to be told?

After 25+ years in this industry, building the first automated pricing and revenue management system for multifamily, working with operators ranging from large public REITs to small regional portfolios and watching budget cycle after budget cycle play out, I've come to believe that our industry has a deeply ingrained and rarely discussed problem. We are systematically better at justifying variances than we are at building accurate forecasts.

The Pattern I've Seen for Decades

Here's how it typically goes. Ownership or asset management either starts with, or responds to the first round of budgets, with a target — let’s say 3% revenue growth. The operator knows, in their gut, that the market conditions don't support it; and more importantly, driver-based forecasts like our product, REBA Budget, show that it is not achievable with any reasonable operational assumptions.

But rather than push back, they take the number, finesse the assumptions, or just outright enter a revenue “plug” and present a budget that hits the target on paper. Six to eight months later, variances have been piling up. Explanations are offered: softer markets, unexpected concessions, an expense surprise. And everyone moves on until the next cycle, when the whole thing repeats. It reminds me of the old definition of insanity, doing the same thing and expecting different results.

I've sat in enough budget review meetings to know that this isn't a character flaw. It's a rational response to a broken set of incentives. The operator who speaks truth to power risks being labeled "not onboard with our goals" or worse, viewed as someone who can’t be trusted to drive the business. And in the fee world, the risk of losing an account is just too high.

On the other hand, operators who give the boss (or client) the number they want get to keep the relationship intact, at least for a while. The problem is that this short-term comfort comes at a long-term cost, to the accuracy of the forecast, to the trust between operators and owners and ultimately to business decisions that depend on reliable projections.

What's Really Going On

Organizational behavior researchers have names for this: it's a combination of conflict avoidance and escalation of commitment. When a budget target gets advocated by leadership, everyone becomes emotionally and politically invested in defending it. And then once set as THE BUDGET, the sunk cost of having committed to the number makes it harder, not easier, to revisit the assumptions as conditions evolve. By the time the variances are undeniable, months of operating efforts have been mis-allocated and corrective options have narrowed considerably.

There's also a principal-agent dynamic at work. The operator's short-term incentive is to preserve the boss or client relationship. The owner's long-term incentive is to have accurate information so they can make good decisions about their portfolio. When those incentives aren't aligned, operators rationally choose the path of least resistance and owners end up flying blind.

Three Things I'd Do Differently Going into Next Year's Cycle

1. Separate the forecast process from the target-approval process. Before any conversation with ownership about whether a budget is acceptable, operators should build a genuine bottoms-up forecast driven by actual drivers--renewal probability rates, realistic time-to-release metrics, market rent assumptions, and current expense run rates. Document the gap between that forecast and the ownership target before the meeting happens. And during the meeting, focus on the drivers rather than the results. Debating reasonable drivers is a strong business strategy and execution exercise; debating the resulting forecast is just arguing with the math. The combination of these two new approaches forces analytical honesty and changes the conversation from "here's the number you asked for" to "here's what the data says, and here's where we differ and why."
2. Reframe what gets measured and rewarded. If operators are only evaluated on whether they hit the budget number, you've inadvertently created an incentive to sandbag; if they are evaluated on their compliance with boss/owner directives, you’ve created an incentive to over-promise. The more powerful metric is forecast accuracy, rewarding operators who give you reliable projections (and the software that generates those projections), whether those projections are good or bad. Very few executives are explicitly tracking "forecast delta" as a proxy for operator quality despite that being clearly the better approach.
3. Change the game. Instead of a single event—the annual budget—move to a monthly reforecasting process. Routinely re-visiting the budget with a monthly reforecast keeps all parties “in the know,” seeing and adjusting to small variances before they become big ones. Of course, this requires a budget and forecasting application that makes it quick and easy to reforecast, something not possible with the Excel-based models the majority of operators use for property budgeting and forecasting. But we should change the tools…not accept dysfunctional processes just because we’ve always done it that way. If this seems too hard, give us a call! (Spoiler alert: our application, REBA Budget, was built to make reforecasting easy)

The Culture Question

None of these process fixes work if the underlying culture punishes candor. Leaders, whether on the ownership or operating side, have to make it viscerally clear that early warnings are welcome and that bad news delivered early is a gift, not a failure. The operator who flags in September that next year’s desired results are not likely achievable is doing exactly the right thing. The operator who waits until spring or summer to explain the variance is not. That behavioral norm has to be set explicitly and reinforced consistently, or all the process improvements in the world won't move the needle.

As we start thinking about next year's cycle, the most valuable thing any of us can do is resist the comfortable fiction. Build the forecast you can actually achieve, with documented drivers (i.e. assumptions) behind it and have the hard conversation early.

The owners who want real information will respect it. And honestly, the ones who don't, who just want to be told what they want to hear, are probably not the relationships worth optimizing for anyway.

Twenty-five years in this business has taught me a lot of things. Near the top of the list: the numbers always win eventually. The only question is whether you're the one who saw them coming.

To explore this topic more, check out our recent Budget Webinar hosted by REBA’s Budget Product Manager, Krista Wilson. This webinar features conversation from industry thought leaders: Maleah Preston (Manager Multifamily Operations & Processes with Hines), Shayda Pourmand (Director of Revenue Management with The Michaels Organization) and Stacy Wells (CEO of SLW Advisors).