Multifamily revenue management (RM) has been in the news for much of the last year. Unless you've been living under a rock since last October, you will be at least somewhat familiar with the accusations of price-fixing leveled at our industry. These claims—originally published by ProPublica—spurred a series of lawsuits involving users of RealPage's and, more recently, Yardi's RM software.
The price-fixing allegations are baseless and are supported wherever they appear by nothing more than innuendo, cherry-picked quotes, and a misunderstanding of basic economics. But they also tell us something about how the multifamily leaders think about the practice of RM. As this article argues, now is a good time for many in our industry to revisit how they think about RM.
A Little Background
Revenue management (RM) is not a recent phenomenon. It started in the airlines in the 1980s, after the 1978 Airline Deregulation Act created the need for airlines to compete. RM helped to redefine airline strategy and commercial tactics, and the technology spread to the hospitality, rental car, and other industries before finding its place in multifamily in the early 2000s.
"RM industries" share a few characteristics. They are fixed-capacity industries, which means you can't increase or decrease inventory based on demand. Inventory is also highly perishable, meaning that once a day of vacancy has passed, the revenue can never be recovered. They have extremely high fixed and low variable costs, so empty units cost practically as much as occupied ones. As a result, RM and marketing strategies tend to be biased toward avoiding vacancy.
Multifamily has the added complication of long lease durations. We sell units for about a year at a time, and about half of them renew. That means we live with bad pricing decisions for a very long time: An underpriced lease affects performance for a year or more, for example. And because properties lease up at different times, occupancy patterns vary a lot, even within the same markets.
To optimize revenue, we must balance all of these factors, and that's hard to do, which is why we need RM software. And therein lies the problem: Relatively few leaders understand the work that RM is doing. They see (or at least think they see) rent increases, but they don't see everything else. And that is a problem, especially in an industry dealing with misleading accusations of price-fixing.
Those who have been in the industry long enough to have experienced multiple economic cycles know that good times don't last forever. Today, for example, we are witnessing unprecedented levels of new multifamily capacity coming to the market after a couple of years of high inflation. Rent growth has softened and even declined in many markets year over year.
If you subscribe to the view that multifamily RM is all about rent increases (as many owner-operators do), stop and ask yourself how rents are falling in an environment where companies are still doing RM. Did everyone turn the software off? Of course, they didn't—the software just doesn't work the way you think it does.
Even in years when rent is growing, demand is seasonal, so properties go through relatively high and low demand periods. Landlords get to raise rents when and only when the market allows them to do so. It is the job of RM to predict demand and use price to manage it to the best revenue outcome.
Revenue managers must, therefore, balance opportunity and risk in markets where properties compete for the same pool of potential renters. Get too greedy on rent increases, and you suffer vacancy loss. Underprice units, and you will sell out without meeting revenue targets. That balance is everything, but it gets lost in the "rent increase" narrative, and that's not helpful.
The ‘Rent Increase’ Narrative
The ProPublica articles and pursuant allegations are peppered with quotes about how RM pushes rents much higher than they would otherwise go. It is obviously true that algorithms recommend different prices from the ones you would choose—that's a big part of why we need them. The surprises move in both directions, but nobody talks about the times when a property improves revenue by reducing price rather than increasing it. That is an unusual characteristic of multifamily housing compared with other RM industries.
I arrived in multifamily with about 15 years of experience delivering RM projects across five different industries. Multifamily was the first and (so far) the only one where I noticed companies fetishizing price increases. Most RM industries fully understand the interplay of price and occupancy. Increasing one always puts the other at risk, like pulling at two ends of the same piece of string.
Hotel companies, for instance, frequently set their prices high, a fact many of us have encountered while booking accommodations. But most of the work in hotel RM is about avoiding the substantial risk of low occupancy periods. Managers carefully manage the business mix—often a year or more in advance at larger properties. High prices are usually the reaction to market circumstances, in the same way that they are in multifamily. The difference is that in lodging, management gets it.
Multifamily is different because we are a balance sheet industry. The primacy of property transactions over operations gives rent increases a particular salience for leaders. But to think of RM only in terms of rent increases skips over most of the details.
I can tell that this perspective clouds how many operators think about the allegations facing our industry. I'm astonished at how often I have read or heard reactions to price-fixing accusations from people inside the industry saying things like, "RM is all about rent increases, so the part about rent increases must be true." The allegations and—sadly—too many multifamily leaders are missing the context that enables them to ride the economic tide to higher rents.
Back to School
Of course, the lawsuits are not about rent increases (which are a fact of life). They allege that companies are working to raise prices together, manipulating supply and pricing like a cartel. Those allegations are not just untrue, they aren't even possible, as we explain at length in a new 20 for 20 white paper: Multifamily Revenue Management and Competition."
The paper debunks the allegations. To do so, it provides a full explanation of how RM works in the multifamily industry. That includes explaining how industry structure and financial incentives dominate pricing decisions, some fundamentals of RM, and real-world research that shows how companies use RM technology.
I encourage you to download this white paper and refresh your understanding of this critical capability that has been enhancing our industry for over two decades. The current stories about price-fixing are misleading, but what is especially important is that multifamily leaders understand why.