In the classic mockumentary This is Spinal Tap, guitarist Nigel Tufnel proudly shows off his guitar’s amplifier, which, unlike every other amp in the world, has a volume dial that can go all the way up to 11.
He had it custom made, he explains, because “10” just wasn’t loud enough.
“But, why don’t you just make 10 louder and make 10 be the top number?” asks the interviewer.
Dismayed, Tufnel blankly declares, “But this goes to 11.”
The interviewer’s point—that all numbers are relative, that they only mean what we make them mean—is certainly valid. But Tufnel’s point—that absolute numbers do matter, and the bigger the better—is also valid. In a sense, they’re both correct, but the truth lies somewhere in between.
In business, more revenue is always better, but the idea of “more” is meaningless without a context. More than what? Last year? Your expenses? The other guy?
I was reminded of this while reading this month’s cover feature, on page 26. Rent growth has been tremendous the past two years—jumping more than 13.5 percent nationally—but has it been quite as tremendous the past four or five years? Think about it: Many operators are only now hitting the same rental rates they were able to charge at the height of the last upturn (the real average annual rent growth since 2008 is only a modest 1.25 percent).
Both numbers, 13.5 percent and 1.25 percent, are equally valid and need to be taken together. If you only considered the first, you’d be an unbridled optimist, and if you only considered the second, you’d be downright cranky.
Sometimes, growth just means making up for lost time.
Another example: If a unit sits vacant for one more day, it wouldn’t kill your bottom line, right? But if you tally up “days vacant” across a large portfolio, the numbers are staggering—for a big owner like UDR, that one day portfolio-wide costs $1.5 million. And reducing that tally by just one day is a Herculean effort.
Like UDR, many operators are shining a spotlight on improving “make-ready” times, and finding some creative ways of doing so, as you’ll see on page 32.
Making up for lost time is also the driving force behind many industry forecasts. Economists say the industry should be building 300,000 units a year to keep up with demand. The National Association of Home Builders recently went one step further, calling for 400,000 units annually.
But, something tells me those numbers are just a little more sugar in the Kool-Aid we’re all drinking.
“You never know what is enough unless you know what is more than enough,” mused the poet William Blake. But do we really have to make that mistake to find out? The industry is only building less than half that amount, and that’s probably a good thing.
Common sense can get lost in all these numbers. But in real estate, all that really matters is what’s going on in your submarket. National averages of rent growth or occupancy or new units are pretty meaningless in that context. And averages are misleading anyhow—the average number of presidential elections won by me and Barack Obama is one.
So, as leasing season approaches, listen to your revenue management software, or your comps, or your gut. Best yet, since this business is all about customer service, listen to your residents. And while you’re at it, crank the volume all the way up to 11.