In the ever-present tension between raising occupancy and pushing pricing, some apartment communities will favor one at the expense of the other. For the sizeable majority of multifamily operators, however, the answer lies in striking a balance.
In this blog post – the first in our series detailing each of the pricing archetypes identified by Rainmaker's analysis of how operators use LRO – we'll provide an in-dept examination of the Balanced Pricer, which is exactly what its name suggests. Operators who embody this pricing archetype push rents when they have the opportunity, but they won't allow vacancies or exposure rates to get too high. Properties that fall into this archetype may not push occupancy as hard as they can, but still protect it. They may push rents to a degree, but not be too aggressive with increases, normally giving up on them if it looks like it will cost the community occupancy.
The essence of the Balanced Pricer philosophy is to find that sweet-spot between rent growth and occupancy where one does not cannibalize the other. Portfolios of multifamily properties cover markets that experience varying supply and demand conditions. Popular metropolitan markets, for example, offer a mixture of great returns and intense competition. Opportunities to grow rent are curbed by competition from fresh supply.
This archetype is commonly found among average, stabilized properties and, generally speaking, is the closest to LRO’s out-of-the-box settings. Its blend of parameters lends itself naturally to stabilized properties and long-term holds – although we will discuss in later blog posts the dynamic nature with which Balanced Pricers switch strategies when market conditions or financial objectives require it. Unsurprisingly, Rainmaker’s research found that it was the most widespread archetype across LRO users.
The Balanced Pricer in Action
Imagine a property in a popular sub-market of Denver. The market has experienced multiple years of astonishing growth, leading to an influx of supply into the market. In this environment, a popular and stable property faces some important strategic choices: on the one hand, the operator may have positive economic data about the market as Denver’s economy continues its growth trajectory. On the other hand, potential renters have more choices than they did before and competition from lease-ups is typically aggressive.
Competition does not purely come from the local sub-market. New properties in new neighborhoods have emerged in recent years, providing more options for residents to choose from as similar living experiences are available in different sub-markets. This complicates the picture for the operator, as they have to account for factors outside of the local submarket and the obvious competing properties. As communities lose residents to home-ownership, the demand picture becomes even less clear.
This is a classic Balanced Pricer scenario. An operator might respond to the risk of new competition by keeping the exposure threshold low, so that it aligns to the property’s budgeted occupancy. As the property starts to move outside its targeted 30-day exposure target that might cause some further tweaking of strategy, to become more or less aggressive.
Although the Balanced Pricer’s parameter settings are on average similar to the out-of-the-box settings for LRO, the reality is that there are crucial nuances in the way that seasoned revenue managers operate the strategy. Savvy operators learn how to read the demand signals from the market – ratcheting up aggressiveness as exposure remains low, while finding other solutions besides price to address higher exposure.
It’s easy to think of the Balanced Pricer simply as a middle-of-the-road position, but the reality is that operators are far less passive in their approach. Rather than simply reacting to the competition, which invariably includes a variety of different strategies (as we will discuss in upcoming blogs), the operator has financial objectives to deliver and must make choices accordingly. Despite what is going on in the market, for example, a property will have occupancy targets and will often be accountable to investors to deliver them. The operator of a Balanced Pricer property must read the market and all of its nuances and above all make sure the tweaks they implement are the right ones.
Next up on our tour of the pricing archetypes is Occupancy Defender. For more details of the original study, please read Pricing Behaviors: Identifying Multifamily's Pricing Archetypes.
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