Determining the right time to adjust your apartment community's pricing can be tricky, especially if you don't have access to revenue management software that adjusts rent prices automatically and far more accurately.
To be transparent, at the time of this posting we're currently working on a new product called RentVision Revenue. The software is still in beta, but is on schedule to be rolled out to our clients sometime in 2022. RentVision Revenue will adjust rental rates weekly based on their performance, helping our clients maximize revenue with precision pricing.
While using a revenue management system like RentVision Revenue is a better option, it’s still important for apartment managers to think about what goes into adjusting rental rates on their own. Our aim in this blog is to help communities who set and adjust their rent manually to do so in a more systemized and effective manner.
When is the right time to manually change pricing?
A common tactic we've seen some multifamily leaders take when manually changing their pricing is to raise the rent on all of their units at the same time, usually right around January 1st.
This approach is problematic for two reasons. One, we wouldn't recommend uniformly raising (or even lowering) your rent. It is the equivalent of giving one-size-fits-all clothing to a group of children—too much for some and not enough for others. A better option—one that works to maximize revenue—is to make adjustments by floorplan, which is what we'll focus on.
The second problem with that approach is it just doesn't correspond with how the market usually works. If raising rent on all of your units has earned more leases in the past, it is likely that your rent prices were too low across the board. Typically, an action like raising rent in the middle of winter inevitably penalizes you at some point later in the year because your occupancy will fluctuate. If one or more of the floorplans in your community starts to struggle, you'll have an instant vacancy crisis and, worse, you won't be able to get those units occupied anytime soon because they're way too expensive.
So how do you avoid this? We suggest you examine both your community's Annual Target Occupancy (ATO) and trailing 12-month occupancy of one of your floorplan's (Floorplan TTM). If you haven't done so yet, check out this video blog with instructions on how to set an ATO that's realistic for your team to achieve.
When you're manually adjusting rent without revenue management software, it's appropriate to raise rent on a floorplan when 1) the Floorplan TTM is above the ATO goal, and 2) you haven't changed pricing on that floorplan in 90 days. Inversely, you know it's time to lower rent for that floorplan when your Floorplan TTM is short of your ATO goal.
This isn't exactly a precise exercise, but making sure both of those things are true is key before you manually adjust rental rates.
The next question, of course, is how much should you raise or lower rent at that time?
How much should rent be manually adjusted?
One difference with RentVision Revenue is it utilizes our proprietary predictive analytics, Floorplan Future Occupancy Projection and Future Occupancy Target, when determining if our clients' pricing should be altered.
For example, an apartment community could have a Floorplan TTM that's currently at 96%, or 1% higher than their ATO of 95%. Meanwhile, their Floorplan Future Occupancy is projected to be 97%, which happens to be 2% higher than their Future Target. Comparing the difference between those two metrics is vital to knowing exactly how much a rent price should be raised. Below is an illustration that indicates what the percentage increase could be according to those comparisons:
Floorplan TTM Occupancy Above ATO
|Floorplan Future Occupancy Projection Above Future Occupancy Target|
If both their Floorplan's Future Occupancy and current Floorplan TTM were below target, then the same methodology could be applied above except put a minus in front of each of those percentages to lower pricing.
Of course, these metrics aren't accessible if your apartment community is adjusting rents manually. But we purposefully included this example so that you can begin to apply a similar methodology when making rent changes at your community. The simplest takeaway is to increase rent 0.5% for every percentage point your TTM is above your ATO, and subtract 0.5% from rent for every percentage point your TTM is below your ATO.
When TTM (96%) is 1% greater than ATO (95%), increase rent 0.5%.
($1,200 x 1.05 = $1,260)
When TTM (94%) is 1% less than ATO (95%), decrease rent 0.5%.
($1,200 x .95 = $1,140)
An approach like this gives you a structure when adjusting rent so that pricing doesn't unintentionally become a hindrance to your actual performance.
Though it's not as precise as a revenue management system, manually adjusting rent is still effective when it's timed and priced correctly.
The two key metrics you need to examine are your Annual Target Occupancy and Trailing 12-month Occupancy. These will help decipher both when and by how much you should adjust your rent.
For more helpful information like this, be sure to download and read our ebook Best Practices For Multifamily Revenue Management by filling out the form below.