Speakers: Ronn Ruiz and Martin Canchola
Guest: Dom Beveridge, Principal, 20for20

Martin: All right, welcome to The Multifamily Podcast with Ronn and Martin. In today’s episode, we’re going to be talking all about revenue management. Get ready to dive into the world of revenue management, one on one, the software behind it, how marketing can actually create demand and really put to bed if there’s actually a cartel price fixing in the multifamily industry. Also make sure to stay tuned, because after the show, we’re going to let you get your own copy of this brand-new paper released by Dom and his team. It is my pleasure to welcome Dom Beveridge, the principal of 20for20.com Welcome to The Multifamily Podcast.

Dom: It’s great to be here. Thanks very much for having me. 

Martin: Of course.

Ronn: That’s so fabulous. Dom, I’m so excited about today’s topic. I think that is definitely one that we need to talk about. We need to embrace. There’s nobody better than somebody who has helped in the world of demand generation prop tech. So, I’m really excited. I’ve always known you as a consummate professional. So, I appreciate you jumping in with us today. But before we kick things off, can you just tell the audience for those that don’t know you, a little background on your experience in multifamily? What led you to create this expansive study on revenue management? Again, an important topic.

Dom: Yeah, well, so revenue management has been just a really big part of my career. I mean, I spent my whole career as a consultant and my sort of functional specialization has always been in revenue management. I’ve worked in a lot of different industries; I think multifamily was the sixth different industry that I’ve done revenue management. And I joined Rainmaker, the company that’s famous for LRO, back in gosh, 2012. And that was really where I got into multifamily. So, I’ve got this domain expertise in both revenue management, and now also in multifamily. When all of this news started to come out, all of these allegations started to come out about price fixing in the market, I immediately sort of started to write about it, because I just recognized that this was not true, what was being said in the press, and ultimately in these lawsuits. And because I was publishing stuff, there were a lot of private conversations that followed, people reached out to me because it’s a very difficult thing. People can’t really talk about this; property management companies have to remain quiet about this just because it’s a highly sensitive issue. But just in private conversations, it really sorts of occurred to me that it’s not just that what they’re saying isn’t true, it isn’t even possible. So, I sat down towards the end of last year, to just write an article explaining that, and I happened to be sitting on a plane, and I got a bit carried away. And before I knew it, we were coming into land, and I was 3000 words into the stream of consciousness. And I kind of realized, right, to actually explain this, you kind of have to explain the background of everything, like industry structure, revenue management, how the technology works, and so on. And so that’s basically why this ended up having to be a paper which we obviously just published.

Martin: Wow. Yeah. I mean, there’s a lot of details in the paper. So, I’m really excited to share it with our audience after the podcast, so they can dive in on their own. So, Dom at a high level, what is revenue management and why does it matter?

Dom: So, revenue management is really part of the toolkit for improving revenue performance at a property. I mean, I guess sort of theoretically, what revenue management systems do is they look out into the future. They see opportunities where demand is relatively low, or demand is relatively high, and it comes up with recommendations of what you should do with price to best position your property, given the market conditions that you’re predicting. I say it’s part of the toolkit because I for a long time been a very strong advocate, you know, back in in, going back to Rainmaker days, I’ve been a very strong advocate of looking holistically at marketing and revenue management as various tools in this toolkit, that enable you to look into the future and do things to improve the performance of your property. Right? So, if I look into the future and I see I’ve got exposure coming up, you know, I have a lot of units that are vacant due to become vacant, not pre-leased and so on. There’s a few things I can do, right? I can push on marketing campaigns; I can try and see what I can do from a leasing perspective to improve conversions. And also, I can change price. So, revenue management sits in that equation is the part that’s predicting the exposure, predicting what the future is going to be like, and it’s figuring out when pricing is the right lever to put on.

Ronn: That’s awesome. I think it’s obviously clear based on what you said, and just the years that we’ve done it, it’s extremely important for multifamily industry. Without revenue management, obviously, tracking communities NOI can be difficult, pretty difficult. How do you see revenue management and marketing both helping with demand generation when it’s needed most? Whether it’s a lease up, low occupancy or even new construction?

Dom: Yeah, well, so right there, you’ve sort of mentioned some of the diversity in the decisions that you have to make, right? Again, I’m sure we’ll come on to talk about this. But when you’re making allegations about things like price fixing, that sort of suggests that the market does stuff in lockstep, right? You have situations where everyone in the market can do the right thing? Well, you just mentioned a couple of examples, you know, if you have a lease up, you have new construction, you have a stabilized property, you have a property where, for example, you might be doing value, add, reposition. And you have all these different things that are going on at a property, and they all call for different actions. So, if you compare a stable community where I’m looking at, let’s say, the exposure for the next 60 days, I’m looking to see whether that exposure is relatively low or relatively high. If it’s relatively high, I obviously don’t want to be aggressive on pricing. In fact, I might price at a lower level. But what I really want to do is push hard on the marketing lever, because I can, the more I can pull leads that interest towards my property, the more options I have for dealing with that potential exposure situation. And so, in the stabilized property, you’re constantly like doing that, that’s what revenue management and marketing ought to be doing. In the case of a lease up, you’ve got all of these chunks of inventory that are coming in this slightly unpredictable way. And, you know, the schedule for delivering apartments that are ready to move into, does not always match the schedule of people who are trying to move house, right. So, you have all of these situations to deal with where you often have to react to quite big, you have to make quite big decisions about what you’re going to do. In revenue management, I often hear people talking about the terrible tools. So, if you’re doing a lease up, you really want to have it leased up in one year. Because once you get past the first year, your renewals begin to compete with your new rents. And if you have a great deal of exposure on affecting new rents, that becomes a very troublesome situation to deal with. So, you know, lots and lots of headaches, lots of big decisions to make on both the marketing and the revenue management side, depending on the situation of the property.

Ronn: That makes sense, the terrible tools, I love it. Competing with yourself at that point, right? 

Dom: Yes, yes, exactly.

Martin: Alright, so now let’s dig into revenue management software now. So, when it comes down to what do most of these softwares help with? And why is it so vital to utilize them for tracking property revenue management performance overall?

Dom: Yeah, so generally, you know, if you’re an experienced property manager, and you’re trying to decide what price to charge for a unit that’s going to be available, you sort of intuitively know things like what’s going on in the markets, you know, how likely I am to rent this apartments, whether it’s appropriate to be aggressive, or whether I need to be more cautious with my pricing, you sort of know these things, just based on your experience. But what revenue management does, it puts a system around those intuitions, right? So, it kind of replaces having to rely on intuition, with data, with forecasts, with optimization, you know, with the mathematics that figures out, you know, that trades off different, your lease durations, different pricing scenarios, and so on. And so, that thing that you kind of know about in your guts that you’ll do, you’re kind of augmenting that by having statistics tell you what’s going on in the market and what you shouldn’t do. What’s likely to deliver the best outcome for you. That improves a few things. So, first of all, if you can get data to your systematize stuff that you think of intuitively. First of all, it makes a discipline process, it’s frequently going to tell you things that you’re wrong about. Again, because we, when we think about stuff, we tend to introduce arbitrary ideas. Like the math doesn’t do that, the math is kind of making those predictions more consistently. So, you’re getting a sort of consistent discipline every day, your review of pricing. And by the way, you’re also doing things like, if you think about things like Fair Housing compliance, because you’re automating the staff, because it’s all encoded in software, you’re doing a far more consistent job of following all of those rules. So, you’ve got this very data driven, very systematized sort of brain that’s producing results, that the property teams now have the opportunity to go and implement in a much more consistent manner.

Ronn: Yeah, so there’s obviously like a lot of chatter in our industry. And in the news about the new cartel, doing air quotes here. That froze the supply of apartments for rent, and obviously, for pricing the units. Can you speak on this new cartel, new kind of cartel? And from your perspective, is it really fact or fiction?

Dom: Yeah, well, it’s definitely, it’s definitely fiction. So, let’s start off by talking about what we mean when we say a cartel. So, a cartel, broadly speaking, is when a group of suppliers get together to coordinate supply, so that they can change prices in the market. So, the go to example, usually for this is OPEC, right? You’ve got a group of countries that control a great deal of the oil supply. And by changing the amount, by saying they’re going to produce more or less oil, they make oil more or less scarce. And that changes the price of oil in the market. Right. So that’s the sort of framework that we think about when we think about a cartel. And they’re sort of parallel ProPublica, and these lawsuits are trying to make us believe, is that because lots of different companies use the same software, and the software sets prices. That means that all of these companies must be coming together to set prices together. And of course, that’s nonsense. It’s no more true than saying, for example, you know, nearly everybody uses salesforce.com. Right? It’s like saying that if we all use salesforce.com, that means that we’re all colluding on how we manage confidential information about sales, about pricing, about that kind of thing. And of course, that’s ludicrous on its face. But that’s the allegation that the, you know, the various actors are trying to make right now. And, yeah, it’s obviously not true for reasons that I expect we’ll go into. 

Martin: It’s funny you mentioned salesforce, because that’s actually what we use.

Ronn: Our people are there at Dreamforce today.

Dom: I hope they’re able to find hotel rooms, because that’s always a problem.

Martin: They weren’t cheap, Ronn.

Ronn: If I were not there. Yeah.

Martin: All right. So, from your perspective, what makes the multifamily industry suitable or not suitable for this type of pricing manipulation? Is it all in the algorithms or do the onsite teams have most of the control here?

Dom: Yeah, well, so there’s some, there are a few different things to understand about the, you know, the makeup of the industry. So, before you get to anything about how the software works, you just got to think about how the industry is. So fundamentally, if you’re going to fix prices, there needs to be a group of people that controls enough of the supply, that they could decide to do stuff like this, right. So, you need some degree of consolidation in an industry before you could really do something like price fixing. You also need for it to be possible to, for those people to agree to do the same thing. And to have that makes them more profitable, right. So, to keep those two things in mind, we need to have a degree of control. And we need a way to control the market, so that if we all walk in lockstep, we all make more money. We think about the way that the multifamily industry looks, first of all, it’s an incredibly fragmented industry. Right? So, they use this example throughout the various allegations. There’s one neighborhood in Seattle, where 70% of the of the buildings or 70% of the apartments are owned by 10 different companies. Well, if you think about that, there aren’t, so first of all, it doesn’t make sense to think about a local market in that way. In multifamily, if I’m shopping, as you guys know, if I’m shopping for apartments, I’m typically looking at numerous different neighborhoods that are equidistant from my job or whatever it is that I need to be close to. So, we don’t shop for apartments in the way that we approach like grocery stores or garages, or any local services that we might consume. So, it’s actually quite a weird framing of consolidation. The other thing, though, is 70% being provided by 10 suppliers. That’s not consolidated, that’s fragmented, like how many grocery store companies provide 70% of the grocery stores in your neighborhood, right? How many, you know that is already quite a fragmented picture. And that’s before you even get to that 30%, which if you know anything about apartments, that’s probably some number close to 30 different companies, in addition to those 10 in that neighborhood. But if you look, overall, it’s a really interesting thing that I’ve been noticing this year is the, over the last decade, multifamily has been getting more and more fragmented. If I compare the NMHC top 50 of 2023, to the top 50 of 2013, the average ownership portfolio has gone down by 17%, the average fee managed portfolio has gone up by nearly 60%. So, what that tells me is that over the last 10 years, more and more companies have come into the multifamily industry, which is great, right? They are on average, much smaller than the established providers. And on average, they’re more like fee managed than they used to be. So, if you think about that, in terms of control, it’s really, really normal now for there to be multiple different people involved in running a property. So, there’s an owner who on average is smaller, they’re outsourcing the running of the property to a fee manager, which means you’ve now got these more complicated decision-making structures that you need in the industry. And but overall, if you just think of the idea of trying to get everyone involved in making pricing decisions about one property around a table to agree on stuff. That’s already really complicated to suggest that we’re going to get multiple different companies into the same conversation and get them all to agree on what we should do at the market level. That’s nuts. Like there’s no way that’s going to happen. So yeah, that’s the one part of it. That’s the sort of fragmentation. The other thing, though, is going back to the thing that Ronn was talking about earlier, where you’ve got all these different situations in which we’re making decisions about demand. Every unit that you set a price for is part of a building, right? So, the units, you couldn’t say all of the units should do this, because what makes sense for each unit depends entirely on the building that it’s in. A building that has high, very high occupancy, very low exposure, is not going to do the same thing as the same unit in a building that has the opposite conditions. Right? Good way to think about it is a small building that, you know, has very high occupancy and a really, really big building that has a risk of vacancy. The small building can take risks, because the downside is not that great to them, the big building, you know, 1000-unit property or something is typically terrified of vacancy, right? Because you can dig yourself into holes that are really, really difficult to get out of. So even if those are two one beds, and they’re in the same markers, they’re going to do the exact opposite thing to one another. So, the idea that you could sort of sit all of these people down around a table and tell them all to do the same thing, doesn’t compute at all in an industry that works the way that ours does.

Ronn: I think the other thing, we’ve made it very difficult because especially in new construction, there’s so many more floor plans than ever before. From what I understand, like you know, before, it was like three floor plans studio, one and two, right? Now it’s like studio A1, you know, A2.

Dom: Well, yeah, and you guys know this better than I do, right? Because you’re, when you think about the strategies you’re going to run for properties, you know, two beds, two baths and studios have quite different demand streams associated with them, right. So, the specific demand for the unit types that suit a particular type of person that might have a different seasonal pattern. Anyone who’s got three-bedroom apartments, the school year becomes incredibly important in the seasonality. You’d like where you’re going to target your campaigns when people are likely to be looking to rent. So yeah, all of these different floor plans, buildings, etc., they all call for different approaches, and it wouldn’t work to have them try and march in all steps.

Ronn: Yeah, for sure. So, when it comes to pricing the units, how can this actually cause occupancy and what’s the strategy behind this for PMCs?

Dom: Yeah, well, it’s so you got that the right way round, right. So pricing, occupancy is an outcome of pricing typically, like when we set prices, the tradeoff that we make is, we can ask for more rents. And the cost of asking for more rent is that we risk fewer people will rent with us, and that makes our occupancy go down. Or conversely, we lower prices, which means our occupancy typically goes up, but obviously, we make less revenue on every unit that we sell. So, when we think about price and occupancy, we’re always sort of pulling on the same two ends of the same string. The mistake that they make in the pro publica piece, and the allegations that the follow is they talk about occupancy as if it’s something that causes price, right. So yeah, they take quotes like we realized that we could make more money at 94%, than at 96%. Right. So, they’re taking that to mean, well, we decided to change our occupancy. And when we changed our occupancy, our price went up. And the reason they’re saying that is because that sounds like what OPEC does, right? Well, we cut the number of barrels of oil we produce and that pushed the price of. In fact, the example that they use in the original article is of lumber, lumber suppliers in the early 20th century, use just cut the amount of lumber they produce to make the price go up. So, that’s sort of trying to spin this story that occupancy is the thing that some, is the thing that’s driving on price. The reality is what companies are doing is, when you adopt revenue management. So, before you have revenue management, you tend to follow a strategy that you would call heads in bed, right. So, whenever I see a vacancy, I just wanted to let, so I’ll drop my price to whatever level I think I need, to just make sure that somebody in my units. Well, if you think about the fact that vacancies come up at different times of year, right? So, if your vacancy doesn’t coincide with leasing season, that might entail dropping your price a lot, right? And so, if I’m trying to, the example I always use is winter in Minneapolis, right? If I’m, it’s very difficult to get people to rent with you in Minneapolis in the winter. So, if I’m really, really committed to making sure I don’t have any vacancy, I’m going to have to give away a lot of rent. Now the trouble is, that decision is going to stick with me for at least the next year and beyond if that unit renews, right? So that means I have to take that discount for a long, long time into the future. Well, a different way to approach that decision might be to say, Alright, I’m going to leave my pricing where it is, I’m probably not going to get someone to rent at that price. But it’s better for me to wait a couple of months to get something close to the price that I want for that unit. Because it means I won’t have this potentially two years of discount, that’s going to affect my performance for a long time. So, by making a decision about rather than about today, which is the way that people used to make decisions, sorry. By making my decision about what’s likely to happen over the next year or two, I come to a different conclusion about how I should price. And that means things happen, like my occupancy went down a bit, but overall, I ended up making more money. So just sort of, so they kind of flipped that on its head to fit with a narrative that they’re trying to push about the industry, but it’s not at all how things work.

Ronn: Right. All right. Yeah. So, let’s dive into how the multifamily industry competes now. I’m really interested in this. You mentioned some truths about competition in multifamily, obviously different strategies PMCs may use for their leasing to keep the high occupancy. I’ll mention each one and then if you don’t mind defining it in your own words, but there are about five, the balanced pricer.

Dom: Yes. So, I’m going to context on this. So, this came from an actual study that was done back in 2017. So, Rainmaker at the time came up with this really, a few other techies came up with this very cool idea that if we take all of the settings here, there’s about 200 different settings that you can configure the pricing algorithm in LRO. If we take those settings and we just monitor how people use them at every property using LRO over time, that will tell us exactly how people are using the software. Right. So, it will tell them strategically what they’re using it for. And like you said, there were five different things. So, to answer your question about the balance pricer. So, this was the person who set LRO, who set the algorithm so that I’m mostly going to maintain this occupancy. But I want to look for relatively low risk rent growth opportunities. So, when I see the following conditions related into the amount of exposure that I’ve got, or you know, how that relates to my history of this property, within these boundaries, I want you to push price. But I don’t want you to push it too high, because I don’t want to put that much occupancy at risk. So, it’s the sort of steady Eddy it’s probably the closest thing to what the, you know, someone like a REIT, somebody who holds their prophecies for a really long time would do it.

Ronn: Was that the first version of like the, like LRO 1.0 with more balanced pricer?

Dom: Well, so they kind of got more. So, this is probably yes, closest to that. It’s what we would call closest to the factory settings of LRO. People sort of get more and more and more sophisticated over how they use it. But yeah, that’s probably a good way to think about it.

Ronn: So, the other one is occupancy defender. I think that’s a great one. That could actually be like a trademark, right?

Dom: Yeah. Well, yeah. So that’s somebody who is very cautious about not being aggressive about pricing. So I mean, if you think about that, I’m just trying to think about somebody who’s, so lots of properties, for example, owned by families, or by family offices, where, you know, they’re not necessarily that motivated to push in a way that bid higher in the same way that like a public REIT like would be. And then mostly look, you know, I don’t really want to take any risks. I want this to sort of run the way that it’s always run, I’m happy to more or less track the market in terms of what I do, just don’t cause any vacancy, because that cost me money. That’s the kind of mentality that you would have behind an occupancy.

Ronn: Pain in the future, right? A vacancy. 

Don: Right, right. Yeah, that’s a good one. It’s a pain avoidance kind of.

Ronn: It’s an insurance policy. About the rent driver, obviously, that’s great for asset managers, right.

Dom: Yeah. Right. So, the rent driver is interesting. And by the way, if it were true, what they’re saying about the cartel allegations, everybody would be a rent driver, right? Because what they’re saying is that people are using revenue management to price above the markup. Well, the rent driver is, comes about in a situation where you have the opportunity to push rents like higher than your competitors. And what you find with this is, it’s a very small minority, because you don’t get that many cases when you can do that. And you don’t find that the rent drivers coincide with each other in the same market at the same time, it’s usually a property that has a particular opportunity. So maybe it’s a small property in a market that’s red-hot right now, where I can be super aggressive, because it’s not that big of a deal. If, you know, a 50-unit property of 1% dropping, 2% drop in occupancy is one unit, right? So, I have latitude to be aggressive when I think the opportunity arises. You might also see this, for example, if a property is being prepared for disposition, like I want the rent roll to be as strong as possible. There are reasons why you wouldn’t follow this strategy under normal circumstances. Again, if you’ve got this opportunity where you can price, you think you can price above the market. Let’s say somebody moves in and pays a relatively high rent for their unit, they’re usually going to move out after a year, because if you’ve paid over overall, it’s because it’s an expensive item, like rent is the biggest check that we write every month. If I find that I’ve paid over market for something, I’m usually going to correct that at renewal rate. So, there’s lots of reasons why people are very, very sparing with this particular strategy. But yeah, that’s basically what rent driver is all about.

Ronn: Yeah, I can imagine what the next 12 months look like when it comes to people pushing rent driving, right? 

Dom: Yeah. 

Ronn: How about the vacancy allergy or vacancy loss, that is something that we should all be allergic to.

Dom: Right, right. Well, this is the extreme version of the occupancy defender. So again, if the occupancy defender is kind of a passive position in the market where, you know, I just want to make it easy. Imagine, you know, a 2000-unit property somewhere, like a really, really big property somewhere where, you know, my 1% drop in occupancy is 20 units, right? So, if I would have a drop like that, that’s a really serious problem. Like that’s a problem where I’m gonna have to start discounting and if my discounting strategy is not successful, I could get deeper and deeper and deeper into this whole, particularly if you’re like, relatively late in leasing season. So, companies like that are extremely wary of the risk associated with vacancies. And exposure is the thing that predicts vacancy. So, whenever they see exposure starting to tip up, they will typically be very proactive in trying to make that number come back down because they really, really hate getting stuck in polls in vacancy. They’re probably the ones that are picking up the phone to run a magazine saying help.

Ronn: ASAP. Yeah, for sure. And then the good old lease up.

Dom: Lease up are just this law unto themselves where, you know, you’re very, you have to be reactive to a lot of stuff. Again, we talked earlier about, you know, schedules for delivery of units and so on. You know, if you’re in a lease up in a market where there are other lease ups, it can get very cutthroat as you know. You really, really want to, you’re placing really high value on getting somebody into that unit for the stuff we talked about earlier. You want to avoid the terrible twos. So that means you have a very, very low threshold for risk on rents. And you are typically faced with situations that require rapid decision making.

Ronn: Especially if there’s other resets around. 

Dom: Yes, yes.

Martin: All right. So, moving on to the next topic. Let’s get into occupancy seasonality and risk. How do you see our industry navigating rent loss in today’s environment with so much talk of a recession looming and leasing slowing down in some markets?

Dom: Yeah, let’s just take a moment to appreciate that given the, we’ve been told that revenue management has this magical power to raise prices above the market. Isn’t it interesting that there are lots of markets where rent is going down at the moment? Are we saying they altered revenue management off, or do we think there might be something else going on in these markets? Of course, what we know is that how expensive rent is in a market, is to do with supply and demand. And of course, there are markets that are, your rent is clearly softening at the moment. And the short answer to the question is there’s a playbook or there are playbooks for dealing with down markets, right? For when you start to see a market softening. Obviously, you don’t have the opportunity anymore to try and push rents up. You’re much more into the mode where you’re the occupancy defender, right? You’re trying to avoid this vacancy that’s likely to come. So, one of the first things that revenue managers do when they start to see this is to slam the backdoor shut, right? We start to get very proactive about renewals. It’s often a really smart thing to do to offer early renewal, come out with early renewal offers, right? So proactive offers to people will renew often months before their scheduled, move out, they in response to some pricing insensitive because we desperately don’t want people to move out. We also, you know, you start to need to get analytical about things like, well, what demand is there. Again, going back to the point about floor plans, we start to notice behaviors associated with particular floorplan. So, in various recessions in the past, you’ve seen things like demand is generally going down, but demand for two beds is ticking up. Okay, well, what’s going on there is that people have started to double up like units. So, you start to have to look for perfect trends like that. So, again, your pricing strategy has to sort of change to recognize the fact that people are just doing different behaviors in response to a softening market. You want marketing to be your absolute best friend, right, and during that time. So, you want to be figuring out exactly where your sort of long-term exposure is, and figuring out what the best channels are. I mean, you should be doing this anyway. But you really, really need to be doing it well, because properties are going to be competing for residents and marketing obviously, as a really powerful lever for getting a bigger share of the market than your competitors are. So, you really want to be leaning on being proactive between revenue management and pricing. You also, the other thing is the operational stuff. Like you really need to pay attention to, you know, to your selling processes, right. Are you following up on all of your leads, or do you have potential sort of spillage or problems.

Ronn: Yes, please.

Dom: Yeah, well, right, right, right. The stuff that you bang your head against the wall, telling your clients all the time, like they should become acutely aware of the need to do that. You also, I mean, it seems like you need to start looking at things like other units that are taking longer to lease them than other ones. Is my problem to do with things like the toolpath or is there stuff that I can do with the unit to make it more attractive? So, there’s all kinds of operational hacks that you can do that. Don’t fall under the purview necessarily of what revenue management systems do, but smart revenue managers kind of get their organizations to be on top of all of that stuff.

Ronn: Yeah, that’s awesome. In the beginning, were there that many levers in control because when I remember, like leaving the site level management side, I didn’t know that there’s that many levers. Did they graduate through the years.

Dom: So, I think what happened was, people sort of get the hang of revenue management. So, once they do that, they’re starting to look at it, they’re starting to look at a longer decision horizon, right. So, I’m looking at the next couple of months. I’m looking at decisions in terms of how they impact the next year, you then you become much more acutely aware of, okay, I could feel this unit by discounting, but I now know what it’s going to do to my performance over the long run. So, you’re really, you get much more aware of the fact that pricing is not the be all and end all, right? So you, you both understand what pricing can do for you, but you come to understand the limits on just changing price. Like it’s not always the right thing to do to change your price. So, if you think about a softening market, you can lower your price, but you’re much better off trying to pull the marketing lever, so that you don’t have to do that. So, you naturally sort of logically progress up, well, what other things can we do that are not going to have this cost associated with this? You know, you get and again, you know this with marketing and people. People naturally see marketing as this cost that I have to pay and that I want to avoid. But the more you get into revenue management, the more you realize, actually, the cost of not doing that marketing thing is ultimately going to be way higher to me. But again, you kind of have to be thinking about things in this longer-term perspective in order to really understand that. I’m sure I’m not telling you anything you haven’t heard many times.

Ronn: Very much so. And yeah, we’re actually working. I mean, I can’t speak to it at all. Behind the scenes, we’re working on some stuff to work in concert with the revenue management for ads. So really excited about that. I think it’s going to help with our industry.

Dom: Oh, that’s super cool. Yeah, really, really good. It’s funny, I was at real world the other week. And I was listening to these new ideas that they have about revenue management marketing. And the thing that really occurred to me was in 2017, the last year we ever did the LRO User Conference, the entire conference was about that stuff, right? It’s like taking this stuff out of revenue management systems. And just looking at pricing and marketing and just figuring out, okay, which of these things am I going to focus on for this particular property, this unit type etc.

Ronn: Yeah, very much needed. So, let’s talk about the impact of the good onsite teams. Obviously, they have so many tasks and objectives on the daily. How can they find balance and leasing and occupancy in today’s volatile economic environment?

Dom: You know what I mean?  I mean, we know that these roles for some companies are kind of changing, right? So, we know that where there’s an opportunity to do so, people are trying to think about how you centralize things like leasing because there’s lots of good reasons to do that range. If I have a really, really good leasing agent, I want that person selling as many of my units as I can. So, from a site team perspective, I want them doing absolutely the best thing that they can do to get every lead close that comes into the property. Revenue management is really designed to take the arbitrary side of pricing out of the equation to the extent possible, so you really want to be getting your leasing agents to sell the experience, the property, the unit, rather than to fall back on lowering price. So, the more and another thing that I’ve always been an advocate for is the more a leasing agent understands about why the price is the way that it is, like why this is an appropriate price in the market. Given the current conditions, the more confidence they have when they’re selling the unit to a potential prospect. So yeah, I mean, this is a great deal of opportunity and sales processes and companies hopefully take the opportunity while they’re kind of rethinking how they want sales processes to work or property to really think about how they just squeezed the most benefit out of every opportunity that they have to sell the units.

Martin: So, let’s jump into revenue management 101 part of the paper. So, in your paper you mentioned four really important topics that we want to dive into each one. So, I’ll just name off the first one and then you can kind of dig into it a little bit, but there’s four we want to cover. fixed capacity being the first one.

Dom: Yeah, so all of the industries that use revenue management, be it the airlines, hotels, rental cars, passenger rail, whatever it is. All of these industries have these things in common. Fixed capacity means that I have to sell what I’ve got, right? I can’t produce more of this thing. Like if I’m busy, I can’t make there be more units. And if I’m quiet, I can’t get rid of units. Like I have to sort of sell what I have, I have to make the best of the inventory that I have. So, what that means in pricing terms is that, during the periods where I don’t have much exposure, you know where I’m busy and where the market is fast. There’s a real risk associated with selling out too cheaply, right? So, it is appropriate during those times of the year where I have the strongest position relative to pricing, right? I have the fewest number of units to sell, and the demand is the strongest. It’s appropriate that I try and increase my pricing over that period. Because everything, every dollar that I give away on those units under those circumstances is my lost.

Martin: Thanks. Okay, and perishability?

Dom: It’s the flip side of that. So, because our units are fixed. In multifamily, we don’t sell units, we sell unit nights, right. The thing that we’re selling is specific to time periods. And what that means is that when that night passes, you have forever lost the opportunity to make money out of that unit. So, the converse risk. So, we talked about the risk of selling out too cheaply. The bigger risk actually is the risk of not selling out at all, right? So, when you carry your price, your units too high, and that means that you don’t sell them. Well, that means the opportunity gone, right? The money that I lost by not selling that unit, it takes a bigger chunk out of my forecast, my budget for that property. So yeah, the risk of not selling my units at the time they’re available is probably a bigger risk than the upside risk that we just talked about.

Martin: Yeah, need to make that compound into more and more losses overall. So Alright, so next one is high, fixed and low variable costs.

Dom: Right. So, one of the weirdest things in these allegations that are being made against the industry is, they’re suggesting that companies decide to leave units vacant in order to make prices go up. Right? So, we already talked about how, you know, that’s a topsy turvy way of thinking about occupancy. The thing that they really miss about this is that, you have extremely high fixed costs with nearly all of the costs of operating an apartment fixed, right? So, if you think about you have to raise capital, so I have debt service, I have the FTE costs associated with running that property, I have property taxes. Everything that goes into that property, whether I rent that unit or not. I still have to pay all of those costs, right. So, if you were to leave a unit vacant, all you would be accomplishing is not making money from it, you would still have to keep paying all of those costs. They don’t go up or down depending on how many units are occupied. And on the flip side of that, it costs you practically nothing to accommodate somebody in a unit, right? It doesn’t, you’ve got costs associated with attracting that person and to the property. Once they’re in their unit, it doesn’t cost you any more to have that person there. So again, being sensitive is very much on getting somebody into the unit because the costs are the costs and your costs do not increase as a result of selling an additional unit in the same way as they do with most other products that you sell.

Martin: Yeah, but if they’re happy with the community, I mean, they could be there for years, right? You know, so, lots of profits to be made. If, you know they can keep a resident and keep them happy and give them everything they need in a community. So last one, seasonal demand.

Dom: Well, yeah, we touched on this earlier, but you can’t escape the fact that demand comes at specific periods of the year in most markets, right? The period between the spring and late summer is obviously a much more attractive time to rent than the rest of the year. And even within that period, you get fluctuations in demand. And you can’t do anything about that. That’s just what happens in the market. There are periods where more people want to move house than other times of year. So, what happens with multifamily is because you’ve got these long lease durations, is that your vacancy occurs at different times of the year. Now what you want ideally is for most of your vacancies to come up at the same time people want to move into apartments, right? So, you want to have product to sell when there are lots of people to buy it. But of course, you know, residents have not read the script, they’re gonna move out when they want to move out and you’re gonna get, frequently get periods where the units come onto the market at a time of year that is unappealing to you. So, it’s a part of the, I use the analogy in the book, it’s like you play Tetris with revenue management, right? You’re trying to line up the pieces so that you’ve got the most attractive blend of leases in your community, right. So, when you’ve got, when you’re in Minneapolis in the winter, and you’ve got some explorations, you want to figure out how to stop that being a problem next year. Right? So, you might offer like a nine-month lease at discounted terms over that period, because that means I’m not going to have the same problem one year from now. So, I might have to eat some discount in the near term. But it’s worth doing that because I’m not going to have that same problem next year. Right. So, a lot of revenue management is simply just moving the pieces around, so that you’re in a position where you line up your availability to the time when people want to buy it.

Ronn: I remember back in my day having like a spreadsheet on a wall in the office. It was like lease expiration spreadsheet. And literally as you would do a lease you’d be like, alright, I sold one for, you know, October 2024. Nobody else can get a lease expiration.

Dom: Yeah, yeah. 

Ronn: Because it’s seasonality. We are obviously in budget season for the new year. Can you kind of explain what the differences between performance and rent increases and how they’re not the same?

Dom: Yeah, really, really important thing. So again, these terms get used sort of interchangeably in the allegations, right? So, we talk about, they talk about, you know, people boasting about when we got to raise prices, and they talk about companies that claim to have outperformed the market. What outperforming the market means that you have to sort of define who you’re comparing yourself to. And the thing that you’re comparing is my revenue performance. Right? So, if we’ve got five different purposes in a market, I got a bigger improvement than they did in my revenue. That means I outperformed them. Well, if you think about that, that means a couple of things. One, I did relatively better than they did. And two, they did relatively worse than me. So, because there is, when you’re comparing yourself because with this fixed capacity industry. When you’re comparing yourself against competitors, there’s this sort of zero sum quality. For me to outperform the others means that I sort of took more out of the market than they did. To increase rents simply means that my rent is higher for each unit that I leased. It’s very, very dangerous when you’re, the companies that get into a mess with revenue management, because I’ve been consulting on this for years and multifamily. Companies that get into a mess with revenue management are the ones that get really fixated on I want to drive my rents up. Because what happens is you’ll find some period of the year where you can price rents higher than you even maybe thought you could. But you generally, the huge risk is that you miss the point where the market turns and if you don’t immediately react to it, every game that you made with a high rent, you hand right back to the market in terms of having a discount to fill the gap that you just created. So, it’s a very subsidy thing to revenue manage thinking that the objective is to drive rents up. It’s the formative. If I want to get a better share of the business in the market than my competitors. And that’s what outperformance means.

Martin: So, in one of your closing thoughts you shared a quote stating the rents necessary to support the creation of new apartments are determined by the cost to develop and operate that housing. Why do you feel this is true from your perspective?

Dom: Yeah, I took that directly from the NMHC affordability toolkit. It’s just a really important thing to remember. Again, when we’re making these extravagant claims about your pricing cartels and so on. These are really expensive assets that you create. You have to go raise money; you have to go through these multiyear processes to build them. The cost of housing in the market relates to how much it costs to build this capacity. And when you get situations where you can’t grow capacity at a sufficient rate to meet the demand in the market. You start to get rents becoming unaffordable, which is certainly what we see in lots and lots of markets. But the drivers of what makes prices go relatively high or relatively low, are all to do with supply and demand and to deal with these costs associated with building, which is why we use this close. I mean, we know that there’s a housing affordability crisis in the market and we know we’re under built by like millions of units for putting on sort of sideshows, where we blame software vendors for stuff that’s clearly structural and to do with these capital-intensive resources that we need more people to create more of. That’s a distraction from the thing that we should be focused on in multifamily.

Martin: Wow, I mean, we’ve covered a lot of great stuff here and I can’t believe we’re pretty much getting close to wrapping up the podcast here. You know, thank you again, Dom for joining us today. I think our audience is going to get a lot of information and insights from this and definitely will be pointing them towards, you know, downloading their own copy. So, Ronn and Dom, any final thoughts before we wrap this up?

Dom: I mean, I’ll just say it’s an absolute pleasure to talk to you guys. And it’s a real pleasure to talk to a couple of marketing experts who I assume have a lot of marketers who follow them because I can’t stress enough. This is a holistic thing. You know, we’re all providing like different and complementary ways to get to the same end of this. So, I love the idea of discussing this with this particular audience.

Ronn: Now for sure, and I agree, I think I mean, we obviously run 100% in the multifamily world, right. And so, we live and breathe multifamily marketing. Our revenue management is obviously, you know, something that we run parallel with and to support it, to understand it even more, right? The drivers that you spoke to today, definitely, obviously, give me more of an understanding of how our work is so important to in this equation. Right. And also, to your point earlier about sometimes those calls we get like we need leases. Right, it’s like so reactionary. So, yeah, really excited about that. And yeah, I mean, at the end of the day, I always say like with regardless of your business model, we are all consumers at the end of the day. So, to understand something in and around the consumer road, including, you know, like you said, airlines, hotels, all the above. Multifamily is just another one of them. So, thanks for sharing, and a lot of good nuggets here.

Martin: Yeah, thank you, Dom. Yeah, so it was a pleasure to speak with you and really deep dive into your latest white paper. To our community, please make time to go to 20for20.com and that’s spelt with the number 20 And then F O R. So, 20for20.com, download your copy. Get the free white paper on multifamily revenue management, and we’ll make sure to share the link in the show notes as well. So again, make sure to subscribe to our podcasts at MultifamilyPodcast.com and download the latest episodes from your favorite podcasting platform. Until next time, you can find us at ApartmentSEO.com and get your free marketing analysis. Also take time to review our latest innovation adz manager, AdzManager.com. If you’re thinking about bringing your Google Ads search strategy in-house, we can set you up with a full demo of our latest product. Let our team take your communities to the next level. Until next time, bye everyone. Bye Dom, Bye Ronn.

Ronn: Bye.