18Jan

New leases are from Mars, Multifamily Renewals are from Venus

Author: Rainmaker Team

New Leases are from Mars, Renewals are from VenusThis is the second installment of our blog series examining the state of renewal pricing in multifamily we examine how renewals pricing differs from new lease pricing.

Last week we showed how shifting market fundamentals are calling for a sharper focus on multifamily renewals. But what does that mean, given that the industry has made such great strides in revenue management over the last decade?

The truth is that the lion’s share of pricing effort is focused on new leases, rather than renewals. Revenue management practices for new leases are supported by well-established processes as well as analytics covering historical trends, real-time supply and demand, competitor data and other insights.

The same cannot be said about renewals, which are not supported by the same kind of analytical power. Multifamily executives estimate that for every hour of attention operators spend on renewals, they spend nine hours on new lease pricing. This is a sobering statistic considering renewals account for more than 50 percent of a community's rent roll.

Pricing for new leases is highly dynamic with many competitors changing prices fluidly. Daily updates to new lease pricing are commonplace in the market, meaning that plenty of published data points exist to keep new lease pricing in check.

With renewal pricing, on the other hand, specific units with specific residents come up for renewal at specific times. Operators choose when to engage residents in a dialogue about their forthcoming renewal. Prevailing market conditions at renewal may be quite different from those in play when the lease was signed. And – crucially, since renewal offers are not published (as new listings are) – operators have little insight into competitor renewal pricing practices. All in all, this creates a set of variables that complicate both strategy and execution of a set of pricing decisions that typically affect more than half of a community’s revenue.

Why Multifamily Renewals are Different

For decades, revenue management has delivered financial benefits across many industries by using analytics to position the right product to the right person at the right time and for the right price. Airline seats and hotel rooms are priced fluidly in highly competitive and transparent markets, and the same is true of the market for new leases in the multifamily industry.

Two important factors set multifamily apart from other revenue management industries. First, long lease durations require multifamily housing revenue managers to consider the seasonality at the time a resident moves out of a unit, as well as the factors at play when they sign their lease. The risk of exposure must be balanced against the value of the current lease.

Multifamily Renewals 2.0

Second, unlike customers in travel and hospitality, multifamily housing residents explicitly renew their purchase (or give notice to move out). This is distinctly different from a “repeat” or return purchase from a frequent flyer (or frequent hotel guest), and the psychology surrounding that renewal decision is thus also unique to the multifamily housing industry.

This adds a couple of important requirements to the task of multifamily revenue management. First, operators must manage their lease expiration profile – a process that Rainmaker has described extensively. Even more importantly, revenue managers must make decisions about pricing renewals.

For a process that affects more than half of a community’s revenue, there are many aspects of renewal pricing that remain surprisingly arbitrary, as we shall discuss in more detail next week.

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