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How Pricing Changes in a Recession

economic downturn

By Les Shaver

When the economy starts to sour, a plan to withstand a downturn and a strong rapport between pricing and onsite teams can pay big dividends.

When the last recession hit, Trey Lane, Vice President of Pricing and Revenue Management for Progress Residential, was working for Archstone—still learning the business as the world was crumbling.

“Even after Bear Stearns [failed], everything still looked good heading into 2009,” Lane said at NAA’s Maximize Conference, Sept. 23–24, in Atlanta. “We had low exposure and the optimized rents were beginning to drop. Then, we saw a continuous uptick in weeks of supply.”

Michael Lilly, Director of Revenue Management for Weidner Property Management, was working at UDR in the late 2000s. He also knew something bad was happening when occupancy started going south.

Jessica Mills, Principal at D2 Demand Solutions, was working for Carmel Partners when the economy started to weaken. While revenue management showed signs of trouble, the noise on the ground from her onsite team was even louder.

“We had some communities in California that got hit earlier,” Mills says. “Our people at one community in Stanton, Calif., told us that the police station posted a sign that it was closed and telling people to go to a nearby station if they needed help.”

After surviving the Great Recession, Lane, Mills and Lilly learned some lessons they think will help them weather the next economic downturn.

For Mills, the key to surviving a downturn is making a game plan for occupancy and revenue declines before problems surface in the economy.

“I’d rather make difficult decisions with the management teams now rather than after the recession happens and everyone is panicking,” Mills says.

While downturns are unpredictable, there is a common chain of events that occurs onsite when residents start moving out unexpectedly because they’ve lost their jobs. As people move out, turns increase, stressing the maintenance team. “We staffed the maintenance teams for 95 percent occupancy, but people were breaking leases,” Lilly says. “We had unplanned move-outs and we had to figure out how to deal with the extra turns.”

Residents also start to double up to save money during bad times, which makes some floor plans more popular than others. “Two- and three-bedrooms suffered when we had smaller floorplans with dens available,” Mills says. “When a recession comes, the den becomes an extra bedroom. That suddenly competes with a three-bedroom.”

Mills saw skips increase and concessions rise. “Everyone was giving concessions,” she says. “We started having to do the second month free to avoid people skipping after first free month and never paying anything.”

For Lane, the mantra was retention. “We stayed in the mid 90’s by focusing on keeping our existing residents and reacting with price on new move-ins cautiously as to preserve total rent roll,” he says.

Now, Lane says Progress is watching months of supply to help provide an indicator of when the next downturn is coming. “Depending on your investment strategy, you may want to defend occupancy or follow the market down and lead the market [back] up,” he says.

At Progress, 65-75 percent of revenue comes from renewals. “We provide the teams with the necessary tools and training to maximize our ability to hold on to residents as close to the market rent as possible,” Lane says.

Part of such negotiating is knowing when to offer leases with rent reductions. When the market started slipping in 2008 and 2009, Lane says Archstone’s residents came into the leasing office to negotiate rent decreases. But when the company proactively offered reductions in rent, that changed. “We offered a small percent decrease to prior rent when the market was inverted,” Lane says. “People stopped coming in to negotiate [at that point].”

While some in the industry recommend offering longer leases during a downturn, Lilly isn’t so sure that’s the best strategy. He cautions that the eight recessions that have occurred since 1960 have lasted 11.5 months each, on average. “I recommend against automatically enabling longer term leases, without first discussing the fundamental drivers [impact and severity] of the recession in each market and doing the math,” he says. “Each recession is unique and not all will impact multifamily the same.”

Although decisions such as when to offer rent reductions and what length lease to push are very significant in recessions, relationships between pricing and onsite teams become even more important when the market turns.

Mills says it’s important for pricing managers to go onsite and develop relationships with the management staff. “You’ll need that relationship when things go south,” she says.

Lilly agrees that pricing and management need to have a good relationship with each other when trouble hits. “Every market was different [during the Great Recession],” he says. “The ones that were hardest-hit were also the ones with the hardest conversations [for corporate] with site staff and the hardest to keep people [site staff] focused on their goals.”