To the outside world, it may seem that all apartment communities share a common and simple goal: to drive both occupancy and rental rates as high as possible.
But those in the multifamily industry know that revenue management strategies can vary considerably from property to property. At one of its communities in Dallas, for example, Harbor Group Management is willing to accept the risk of higher vacancies in order to push aggressively for rent growth. Meanwhile, in New York City, one owner–operator of numerous and massive apartment communities (which requested anonymity) seeks to maintain occupancy above all else, knowing that even a percentage point of vacancy can have an enormous impact on cash flow.
In the end, the revenue management strategy an operator pursues at a community is forged by a number of factors, including the condition of the surrounding submarket, how long an owner intends to hold the property, and the owner's general appetite for risk.
To better understand the scope of pricing behaviors and strategies at play in the apartment industry, software and services provider Rainmaker conducted a comprehensive analysis of how customers use its LRO (Lease Rent Options) revenue management system. The study covered thousands of communities across the country and identified five major pricing archetypes: The Balanced Pricer, The Occupancy Defender, The Rent Driver, The Vacancy Allergic, and The Lease-Up.
By learning about these pricing personas, multifamily executives can develop an easy way to understand and talk about revenue management strategies within their companies. What follows is an overview of each archetype, along with insight from various operators’ experiences in implementing the personas at their communities.
The Balanced Pricer
The Balanced Pricer is exactly what its name says. This pricing persona will push rents when it has the opportunity, but it won’t allow vacancy or exposure rates to get too high. This strategy is commonly found at average, stabilized properties.
This approach strikes a balance between risk and reward that is widely embraced across the generally conservative multifamily industry. Bottom line: Communities that follow this strategy are unlikely to beat their markets in terms of rents for any significant period of time, but they won’t fall behind either.
Submarkets that are experiencing significant amounts of new construction, like those in Denver’s urban core, make aggressively pushing for rent growth a risky proposition and thus favor Balanced Pricers.
While market data may indicate a positive economic outlook for a stabilized property in Denver, renters now have more choices than ever. Luxury communities in lease-up are often aggressive with concessions to drive occupancy and meet pro forma. This complicated competitive landscape may require a Balanced Pricer to focus more on occupancy by keeping the exposure threshold low in its revenue management system.
Some may assume the Balanced Pricer operates in somewhat of an autopilot mode, but this strategy shouldn’t be confused with passive pricing. Savvy Balanced Pricers learn how to read demand signals from the market and will ratchet up or dial back aggressiveness when necessary to ensure business objectives are being met.
The Occupancy Defender
Generally, operators who adopt the Occupancy Defender pricing strategy are looking for steady returns. The owners of the community have made an investment, and they wish to receive a reliable return on those dollars.
As a result, Occupancy Defenders attempt to keep their communities as full as possible. If competitive properties reduce their rents, Occupancy Defenders usually maintain price parity or at least remain close to it so their properties don’t lose residents.
Sometimes operators that are traditionally Balanced Pricers will become Occupancy Defenders right before or during a recession because the market upside is small and the downside risk large. When the market recovers, they go back to being Balanced Pricers.
In terms of revenue management tactics, Occupancy Defenders configure their systems to allow more room to price below the reference rent, or the point at which prices are set for a given property. In a nutshell, when operators price above this point, they’re pushing to grow rent. When they price below it, they’re trying to stimulate more demand and gain additional occupancy.
Occupancy Defenders are typically more responsive to competitor price changes, especially on the downward side, and more sensitive to the pace at which they are leasing, especially over the preceding one or two weeks. Bottom line: They don’t want to assume the risk of vacancy by pursuing aggressive rent growth.
For Irvine Company Apartment Communities (ICAC), an owner–operator with resort-style communities totaling 60,000 units in coastal California core markets, the winter months in metro San Diego represent the perfect time to become an Occupancy Defender.
Like many operators, ICAC’s communities sometimes change strategies throughout the year, depending on demand conditions in the surrounding submarket. “Very broadly speaking, we seek to be Balanced Pricers,” says Daniel Amaral, senior director of revenue management for ICAC.
However, the company has found that a more conservative approach is required in San Diego once fall rolls around. “From about September through March or so, things get really quiet,” Amaral says. “In this time, we’re really just trying to hold on to occupancy, so we’re definitely a bit more sensitive about decreasing rates when needed and a little bit shyer when it comes to pushing.”
ICAC’s fiscal-year goals also play a role in the company’s decision to become Occupancy Defenders in the winter. “Within a fiscal year, we have revenue targets to hit, and those are tough to hit if you’re dipping below planned occupancy for some extended duration,” Amaral says.
The Rent Driver
The apartment industry generally favors conservative pricing strategies, but the Rent Driver represents a notable exception.
Rent Drivers are operators that decouple their pricing from their competitors. They’re OK with higher exposure rates. If some units are vacant, they’re willing to let those apartment homes sit empty for a while in order to achieve a higher price instead of maintaining occupancy at a lower rent. They also don’t allow a lot of downward movement in prices, either as a response to a competitive change in rate or as a reaction to supply and demand shifts.
Rent Drivers often push pricing to increase the value of a given community in anticipation of selling it. If an owner–operator is prepping a property for disposition, it wants to get to 94.5% to 95% occupancy at as high a recurring monthly rent as possible, because that’s going to shape the multiple that in turn dictates the sale price of the asset.
Rent Drivers are also often seen in markets with supply-side constraints due to geographic limitations or strict zoning rules. Often, owner–operators who want to pursue this pricing strategy will enter markets like San Francisco, where putting up a new apartment community is an expensive and time-consuming proposition. But that supply-side constraint allows them to be a lot more aggressive in pursuing rent growth.
A North Dallas apartment community owned and operated by Harbor Group Management is a good example of a Rent Driver in action. There, the company decided to aggressively push rents, largely because of the sizzling apartment market in the area.
“North Dallas and Dallas as a whole are both just incredible right now with all the employment growth and the major companies coming to the area,” says Kevin Huss, director of revenue management at Harbor Group. “There’s a lot of building going on, too, but I don’t see the market there slowing down much.”
Since Harbor purchased the community in 2015, its rents have grown by roughly 20%. In fact, the company sold the property at the end of last year—two years ahead of its original time frame—because of the aggressive rent growth and resulting increase in value.
One challenge in being a Rent Driver, Huss notes, can be maintaining the confidence of the on-site leasing team. “They have to be patient and be OK with the uncomfortable feeling that can come with higher exposure and with having several prospects come through the door and not sign a lease,” he says. “The pricing teams therefore have to be there to steady [the agents] and let them know you’re pursuing a path that’s a little unusual in this industry.”
The Vacancy Allergic
Even more so than Occupancy Defenders, The Vacancy Allergic is ready to significantly drop rents when necessary and is willing to leave rent growth on the table in favor of making sure that an asset stays full.
As for their revenue management systems, Vacancy Allergics generally set up their systems to begin backing off prices at low exposure levels. They want their system to be very responsive to competitive price changes, especially rent reductions.
Broadly speaking, there are two kinds of operators who fit the Vacancy Allergic archetype. One is looking for a consistent revenue stream for ownership and investors. The returns don’t necessarily need to be huge, but these operators want to have a firm handle on what’s coming in every month; they aren’t comfortable with a great deal of volatility in the revenue they collect.
The other kind of Vacancy Allergic operator is one with very large assets, typically in major urban areas. At these communities, any measurable uptick in vacancy quickly converts into a very significant dollar amount. Say, for instance, a 1,000-unit property has a 2% vacancy rate. That translates to 20 empty units, meaning a lot of revenue is left on the table.
The size of communities in the New York City market is definitely one reason there are Vacancy Allergic archetypes in the area. The executive leasing director of the aforementioned unnamed company with a large metro–New York multifamily portfolio says, “For us, the size and breadth of our communities and the amount of natural turnover that we have almost demands that we defend against vacancy.”
Another factor in markets such as New York is the extremely high cost of rent in the metro and the significant sums of money an owner therefore doesn’t collect when an apartment is sitting empty. In high-rent markets, a month of vacancy can be extremely expensive.
“We don’t approach it with an ego,” the leasing director adds. “Not all trees are going to grow into the sky, but the one thing I know about this business is you never replace a day of lost rent.”
Operators who follow the Lease-Up strategy have communities coming on line and have pro forma rents and occupancy rates they’re aiming to achieve by stabilization. They don’t give their revenue management systems a lot of room to move prices up or down. They set very high exposure thresholds to compensate for the simultaneous availability of so many new apartments and configure their revenue management systems to anticipate a high leasing velocity.
Unless they’re significantly ahead of their occupancy budget, Lease-Up operators will keep their rents down. Furthermore, to build occupancy, they’ll often offer concessions and then let those concessions burn off at renewal time.
Once Lease-Up communities achieve their occupancy goals, it’s not uncommon to see them become aggressive in their pursuit of rent growth. That’s especially true if the owner is planning to sell the community shortly after its stabilization. That dynamic also plays out in instances in which the developer intends to keep the property and is planning another new community in the same submarket, says Bryan Pierce, director of revenue management for Gables Residential.
“If there’s a developer planning on developing more units in that area, they don’t want to see rents go backwards, because that impacts their ability to do that newer development,” Pierce says.
An Easier Way
When multifamily executives understand the outlines of the five major pricing personas, they gain more than a knowledge of the pricing strategies at work in the industry; they also acquire an easy, convenient way to talk about revenue management within their companies.
Because these archetypes are easy for all stakeholders to comprehend, they can help drive the understanding of, and confidence in, a community’s pricing strategy across the entire company.