It’s no secret that 2024 will be a year of anemic revenue growth for multifamily rental operators and owners. On the one hand, we are still benefiting from the once-in-a-lifetime rental growth in the early post-pandemic years; however, on the other hand, growth is very much a “what have you done for me lately” proposition. And the challenges of slow rent growth play out in a variety of ways from deferrals in tech investments to increased pressure to reduce headcount all against a backdrop of other un (or only partially) controllable expense growth like insurance costs.
So what is a self-respecting and energetic operator to do in this environment? And how can their pricing and revenue management team help? Having been through the recessions of 2002-03, 2008-09 and 2020, here are my seven key strategies for helping revenue growth in 2024.
#1 Review the settings on your revenue management system (RMS)
In challenging times, defending occupancy can be a better strategy than trying to get more rent growth. Whatever your strategy, are you sure your RMS parameter settings match that strategy? Also, does your RMS let you fit your software to your strategy? Some of the legacy systems have very few user-defined parameters and thus tend towards a “one size fits all” pricing approach. That’s not good in a bull market; it can be disastrous in a bear market.
And if you’re reading this and saying none of this applies to you because you don’t have an RMS, then you really should get one. No matter how smart and knowledgeable you are, you can’t possibly adjust pricing as frequently and as precisely as a good computer algorithm can. If you don’t believe that, give me a ring and I can share with you the result of several formal “test vs control” studies that prove the value of a good RMS.
#2 Review your override rates
If you’re overriding more than 10% of your RMS’s recommendations, then you need to determine whether you are getting in the way of your RMS or whether your RMS is just not giving you good price recommendations. If the former, then get out of the way and let the RMS do its thing; if the latter, then get a new RMS. I often hear of some companies overriding 40% or more of at least one legacy RMS’s recommendations. It makes me wonder why anyone would pay for software they ignore that often. Either figure out what you need to do to configure the system so you don’t have to override so often, or get a different system.
#3 Consider the total cost of ownership (TCO) of your RMS
You probably know how much you’re paying each month for your RMS. But how much are you paying for the team that supports it? When revenue growth is small, it’s a great time to take a look at your expenses. Our industry has seemed to just accept Pricing and Revenue Management (PRM) teams as a cost of doing business, and legacy RMS vendors have not put any effort into reducing the TCO. There are now options for systems that allow revenue managers to handle more communities and thus reduce the cost of operating an RMS.
#4 Transparency
Tough times tend to test the relationship between operations and PRM teams. How well does your operations team understand the RMS you use and why it recommends what it recommends? How well can your PRM team explain those recommendations to Operations? And to executives? If you’re not satisfied with the answers to those questions, then it’s worth the investment to bring in an expert to help train either or both sides. And it’s also worth asking whether your RMS offers enough transparency for your team to be able to understand. Some RMS are much better than others at making it clear why the recommendations are what they are.
Lack of transparency is also one of the reasons I’m skeptical of AI pricing solutions for multifamily housing. We lack the requisite volume of data for machine learning to work well; and even if it does, AI is the very definition of a “black box.” Operators (rightfully IMO) are anxious about black-box solutions when they are on the line for results. It’s awfully hard for an operator to own financial results when they don’t have access to, or ability to control, pricing.
#5 Uncover hidden treasure through unit amenity reviews
This is often the quickest way to improve revenue when base rents are flat (or negative). In my career, my team and I have reviewed unit amenity configurations for well north of 1,000 communities. 98% of the time, we find material opportunities, often tens of thousands of dollars a year or more.
Once amenities are configured correctly, we can also do statistical analyses on the leasing pace of units with and without certain amenities to assess whether the amenity price is too high, too low or “just right.” This adds an additional, and ongoing, layer of value to the exercise.
These exercises used to take many hours per community to do in Excel. However, now there are tools/applications that can do this in minutes. One word of caution: given the current legal environment, I believe it’s imperative to use tools or applications that only use “first-party” data (i.e. your own internal data). This will steer clear of any potential regulatory or legal challenges.
#6 Improve your pricing on lease-ups and renos
Part of the reason for suppressed rent growth is the recent and upcoming large number of new build product, so it’s likely that many readers are dealing with lease-ups in this environment. For a variety of reasons, legacy RMS tend to struggle with lease-ups to the point that many don’t even use RMS on lease-ups. At a minimum, operators should create some manual reporting and processes to stay on top of lease-up pricing; perhaps more impactfully, it’s worth looking at new RMS products that solve the lease-up pricing challenge.
This also applies to renovations. Legacy RMS do a better job here than with lease-ups; however the workflow can be a bit clunky. Investing extra time in getting these to work for you is worth it; and again, new entrants offer new opportunities for improving renovation performance.
#7 Implement appropriate concession strategies
Slow- and negative-growth times put a premium on price positioning. Do your prospects react better to a “deal” or to net pricing? Do you need to use “don’t leave the door” concessions? What about strategies to maintain higher online (gross) pricing to protect renewal rates? There are no easy solutions, and answers often vary by market and/or class. Legacy RMS were built with the assumption that concessions would become a thing of the past, so they don’t handle them particularly well. Not only have concessions not gone away…they’ve stayed particularly important in challenging times. Now might be the time to look for more contemporary solutions that handle concessions much better, giving you the flexibility to craft your pricing strategy the way you need to for these tougher times.
Read more about our revenue management philosophy and the lessons we’ve learned in our PRM White Paper, 20 Years of Lessons in Rental Housing Pricing & Revenue Management.
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