23Jan

Why Renewal Pricing is Harder

Author: Dom Beveridge

This is the third part of our blog series on the state of renewal pricing in multifamily. In today's post, we'll outline the challenges that make renewal pricing harder than pricing new rents.

puzzle-1487340_960_720Over the last decade revenue management systems have been in mass-adoption in the multifamily industry. This has been a highly positive development, as operators and investors have enjoyed impressive returns from their revenue management initiatives. However, the focus of processes and applications has skewed overwhelmingly towards the pricing of new leases. The attention focused on renewal pricing has been well below its share of the revenue.

As things currently stand, the differences between renewal and new lease pricing are quite significant.

To date, in the multifamily industry, these differences have not been addressed adequately by analytical technologies or – for the most part – rigorous or consistent processes. In the absence of rigor and consistency, some important challenges remain for multifamily operators. We shall highlight some of the most important ones below.

The Challenge of Timing

While leases end on defined dates, the timing of renewal offers allows operators some discretion. There are two important variables affecting the timing of renewals offers: how far in advance of the lease expiration the offer is generated, and the frequency and composition of the batches of expiring leases that are processed at the same time.

With most residents requiring a 60-day notice to vacate, renewals are potentially being processed 75-105 days in advance of the end of a lease (this is based on a 60-day notice with monthly batches and a desire to provide the resident at least 15 days to consider their choice). The decision of when to make a renewal offer can – and should, particularly in changing market conditions – be impacted by strategic considerations of the property. As operators seek to minimize exposure, it sometimes makes sense to offer residents the opportunity to secure an attractive renewal offer in exchange for their early commitment to renew their lease.

However, long lead times present their own risks, as current market pricing data is highly dynamic and visible to current residents. It is difficult for operators to predict where pricing will be after they send out renewal letters 60 or even 90 days ahead of lease expiration. This can lead to instances where front door pricing on a floor plan has dropped, but renewals were previously sent out with offers that are significantly higher than current new lease rates.

Pricing fluctuations like these can alter resident perception. What seemed like a good deal at the time of an advance purchase is perceived to be a bad deal to the resident as we approach the timeframe when the renewal lease will actually take effect. This can cause residents to question a community’s pricing integrity, creating a negative customer experience if not managed carefully.

Batches and Broad-Brush Decisions

However far in advance offers are issued, those offers are typically created in batches for a particular time frame, and reviewed by stakeholders before being shared with residents. As a result of the inflexibility of current renewals platforms, it is normal for operators to execute this process on a monthly basis (or at most twice a month).

Frequency is not the only issue with bulk-updating of renewal pricing. Today’s renewal batches are largely defined by time alone. Although commonplace, this is a relatively crude approach as it misses the important opportunity of segmenting based on the characteristics of the lease. Different units and different leases frequently require different pricing within the same batch. Current processes are too inflexible to help users to achieve this level of granularity.

Multifamily Renewals 2.0

Another long-standing problem with renewal pricing platforms is that they make it hard to process renewals within the batch. The daily cadence of price optimization means that renewal prices are updated on a daily basis, providing too little time for users to review and process renewal pricing before prices are over-written. This rigidity means that the process of generating prices does not reflect the reality of the analysis and approval processes.

The Cost of Cumbersome Approval Processes

Although operators generally spend far less time on renewals than new leases, that doesn't mean existing renewal pricing processes are efficient. Completing the analysis and getting executive alignment on the recommendations can be cumbersome and time-consuming.

Revenue management platforms have historically generated batches of renewal offers based on a set of default strategies and system settings. Pricing managers then typically pull the recommended pricing for those batches into a spreadsheet and pass the spreadsheet around among an audience of different executives and managers.

The practice of reviewing spreadsheets and gathering feedback from a community of managers is highly time-consuming (robbing managers of time they could spend serving their associates and customers), and creates obvious opportunities for inconsistency as changes cannot always be reliably tracked in an Excel spreadsheet sent via email.

This multi-step approval processes also creates downward pressure on rent increases, as managers negotiate price increases before they are even sent to residents. Rarely do these “negotiations with themselves” result in higher renewal rates; they almost always result in lower renewal offers. The desire to avoid difficult renewal conversations creates the natural impulse that feeds this dynamic.

Why Inconsistency Matters

Now we begin to see how the problems of renewal pricing concatenate. It is difficult to batch renewals in a meaningful way, and there is little reliable data to evaluate renewal pricing decisions. Not only is it difficult to devise a successful renewals strategy, but it is hard to know what success itself looks like.

This problem becomes self-perpetuating, leading to a renewal process that wastes management time; lacks transparency, certainty and consistency; and is thus generally perceived as somewhat arbitrary by all stakeholders (community associates and residents).

This has tremendous impact on how property managers execute renewals. They typically have to prepare themselves for difficult conversations when renewal offers go out, so anything that seems arbitrary undermines their confidence in discussing these decisions with residents.

To residents, renewal pricing often comes across like a black box, just as new leases once did. A decade ago, an on-site person may have explained the price of a new lease by saying, “Well our revenue management system comes up with the price, and I don’t know how that’s done.”

Now, new lease conversations involve highly informed on-site associates who can talk about the impact of market conditions, individual unit amenities and the other factors affecting how rents for new leases are calculated. That makes for a vastly better customer experience for prospects, one that stands in marked contrast to the experience that same prospect is likely to have as a resident one year later.

 

Next week we return to data analysis to explore how getting even slightly more aggressive with rate increases at renewal can have major impacts on community revenue.

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