By Bradford K. Marting and Jennifer A. Nevitt Casey
Establishing prices for apartments has become an often debated topic of late. Whatever system used to evaluate and set rent levels is considered a pricing model. There are manual systems, automated systems, and hybrid systems. Pricing models support various strategies at different times based on particular market conditions, property conditions, and personal paradigms and prejudices. However, one thing can generally be agreed upon – it can be brutal out there right now.
One well known pricing strategy is known as the “takedown.” A takedown is when an extreme price reduction is applied to a specific apartment type by floor level and can range anywhere from a 10% to 20% price reduction from the current market rent. Usually, takedowns are used for a period of hours or days in order to quickly absorb an oversupply of a specific product type and, a decade ago, they were never intended to be considered a permanent solution to oversupply.
However, in the past year, takedown pricing has become more extreme, more universal, and threatening to become more permanent. During inflationary times, pricing models focused on finding the inefficiencies in capturing income. Utilizing the same rule sets and algorithms during deflationary times can result in very different outcomes and can be financially destructive to the investment property. What is meant by financially destructive? If takedown pricing is held for too long a period of time while occupancies by unit types are in fact increasing at lowered rent levels, the ability of investors and owners to make their mortgage payments can become difficult or even impossible. Yes, impossible.
In the past, competing properties typically would try to gain market share by matching or beating each others’ lowered rents and concessions. Add to this price war the effort to secure longer lease terms than the typical 12 months and you have a long-term recipe for financial disaster. This constant matching of current price or special discounting programs is only causing a downward spiral for the entire industry to a point where recovery will be prolonged. In the past decade, fluctuations of pricing from 8 to 15% discounting ranges specific to unit types or floor levels have been recoverable income offenses if used for brief periods. However, 20%-35% takedown pricing on all unit types across-the-board for extending periods of time will prove to be destructive, possibly resulting in massive commercial loan defaults in the near term.
If apartment investors are looking for 8% returns and income streams have declined by 25%, not only is there no money to pay the mortgage payment and tax bills, but no cash for the desired return. In fact, if there is no positive cash flow, the investor will be forced to contribute additional funds just to keep the property operating. They will be forced to make a difficult decision of putting additional money into a losing business or allowing the property to be foreclosed or taken back by the lender.
There is little question that new situations require new thinking and tools such as the “Marting Nevitt Survival Plan.” The plan reveals the breakeven points and the point of no return (no pun intended). After studying the pricing dynamics in major markets over the past six months, it is clear that pricing models are falling below the point of no return with no voice of reason to assist corporate decision makers in setting a boundary for income reduction that will force their assets into loan default.
Manual pricing models continue to have limitations based upon personal paradigms, prejudices, and unparalleled financial interests with the investment objectives. It is not unusual for the leasing team members not to be able to meet the financial requirements to qualify to live where they work. In other words, they cannot afford what they are expected to sell. Therefore, because they are likely paying much less rent at a lesser property, they may feel the product they are leasing is already “overpriced” and resistant to raising prices. There can also be resistance to raising prices from the onsite leasing teams because they perceive it as making their job of selling more difficult. And this can be true. This can result in resentment against management and a reduction in productivity.
Automated pricing models are relatively new compared to manual pricing models. There are but a few even commercially available. The premise makes logical sense and time will tell how successful they will be. Removing the human fear of adjusting rents either too high or too low is a substantial benefit of custom software development. As with any new technology, it has its supporters and critics.
The hybrid pricing model is a mixture of both manual and automated pricing models. The automated model is allowed to run its program and make pricing recommendations. The recommended prices are then scrutinized or challenged by humans. The result is that the automated recommended price will either be accepted or overridden. Some companies are even creating job positions where reviewing prices is the sole responsibility.
No matter which pricing model you choose, it is imperative to understand basic real estate investment theory and the ultimate affect it can have on a multifamily real estate investment. Pricing too high can result in higher vacancy, which can lead to financial ruin. Pricing too low can result in prolonged lower cash flows, which can also lead to financial ruin. Fortunately, there is a sweet spot somewhere between the two. Utilizing new technologies and new tools can provide you with a competitive advantage necessary for survival and success.
Don’t miss Brad and Jennifer’s workshops on March 23rd and 24th in Dallas
Revenue Management – Basics-Day One
Pricing is key to successful marketing, but can be one of the most difficult aspects of the marketing process. This session delivers essential skills and knowledge needed to optimize your pricing while minimizing costly trial and error. You’ll learn the fundamentals of ‘Power Pricing,’ gain an understanding of pricing dynamics and key metrics used to set up a manual pricing model, and walk away with the skills and knowledge you need to set up an individual manual pricing model for your product.
Revenue Management – Advanced-Day Two
This session goes beyond the fundamentals of ‘Power Pricing’ to deliver the knowledge and skills needed to execute and maintain your manual pricing model to increase cash flow and the overall value of your organization. Learn how to use reports and graphs to more effectively communicate with your team and stakeholders and confidently manage your organization’s revenue. (Prerequisite: Revenue Management – Basics)
Our workshops are designed to deliver the skills you need to compete in today’s challenging environment. Choose from Power Pricing: Revenue Management BASICS or ADVANCED courses, individually priced so you can attend the course-level that you need most, or choose BOTH! To take advantage of discounted individual course pricing:
Power Pricing BASICS ONLY – MARCH 23 – ONLY $175
Pricing is key to successful marketing, but can be one of the most difficult aspects of the process. This session delivers the skills and knowledge you need to optimize pricing while minimizing costly trial and error. Learn the fundamentals of Power Pricing; gain an understanding of pricing dynamics and key metrics; and how to set up an individual manual pricing model for your product!
Power Pricing ADVANCED ONLY – MAR 24 – ONLY $175
Go beyond the fundamentals and learn how to execute and maintain your manual pricing model to increase cash flow and the overall value of your organization; use reports and graphs to more effectively communicate with your team and stakeholders; and confidently manage your organization’s revenue.
BASICS+ADVANCED! (2 DAYS) – MAR 23-24 – ONLY $304!
DON’T MISS IT! Register to attend these workshops .
Mr. Marting is a professional speaker, trainer, and consultant for OptiYield, a consulting company specializing in profit optimization for real estate investments. His formal education includes a Bachelor of Science degree in Business and a Masters of Business Administration degree. He is a licensed real estate broker and holds designations as a Certified Property Manager, Certified Commercial Investment Member, Certified Apartment Property Supervisor and an Accredited Apartment Association Instructor. He has more than 30 years of real estate experience and has served as an officer and past chapter president for both IREM® and NAA®. In 2009, he was the Chairperson for the Income & Expense survey for residential real estate assets for IREM®. He is an award-winning author for his article in the Journal of Property Management on Yield Management and was co-founder and co-inventor of YieldStar®, a rent optimization system. He has acquired, managed, sold and consulted on more than three-billion dollars of real estate investments.
Jennifer Nevitt Casey
Since 1993, Jennifer Nevitt Casey, Chief Executive Officer of Bravo Strategic Marketing, Inc., has developed return-on-investment strategies for multifamily real estate investment portfolios with a capitalized value exceeding $6 billion. She is also a highly successful income growth strategist for residential assets and considered one of the nation’s most innovative real estate marketers. She is also President of Rohman Management and a Partner in Rohman Development, a New York City-based real estate development firm formed by a group of veteran professionals targeting the southeastern United States as its focus point for apartment development. She provides consultation on product design, the importance of a development’s timing, correct market positioning and proven successful leasing and for-sale marketing strategies. She is a contributing author of the Urban Land Institute’s book, “Developing Multifamily Housing,” and co-author or the National Association of Home Builder’s book, “How to Excel at Leasing Apartments.” Her credits also include inventor and founder of YieldStar Technology, LLC, a yield management, B2B software application that optimizes revenue for the multifamily real estate industry and whose assets were acquired by RealPage. A dynamic speaker known for captivating audiences, she has trained over 20,000 professionals within the multifamily industry and sales teams for newly constructed condominiums and single family homes.