Forbes — Addressing Multifamily’s Uncomfortable Relationship With Supply And Demand
Funnel Leasing CEO, on the need to embrace sustainable growth as good stewards of the multifamily industry.
Housing affordability is a worsening problem. As a part of the multifamily industry, which is the real estate segment most often associated with housing affordability, I’ve noticed a tendency for the industry to speak out of both sides of our mouth.
Remember 2021, with its historically high rent increases in many markets? The Tampa metro area, where I call home, led the nation with a 30.4% rent increase. Astronomical increases like that are unsustainable and inevitably lead to calls for legislative action in the form of rent control.
Astronomical increases like that are unsustainable and inevitably lead to calls for legislative action in the form of rent control.
Demand recently decreased, and the rental market is softening, triggered by fewer household formations. Renters are shifting their behavior in response to housing affordability and macroeconomic uncertainty. For context, nearly half of all young adults are living at home, which is a rate that we haven’t experienced since the end of the Great Depression in the ’40s. These shifts in the multifamily market are symptoms of broader challenges facing multifamily operators and renters.
The uncomfortable truth for this industry is that in the short term, decreased demand is a good thing for renters because it’s driving better housing affordability and slowing unsustainable rent increases.
Doing Better As Stewards Of The Multifamily Industry
The skyrocketing rent increases of 2021 were unsustainable long term. If we believe in the future of this industry, we need to have sustainable growth. Sustainable growth doesn’t need to come at the cost of renters. We need to drive more housing supply to positively impact housing affordability. We also need to embrace, or at least be comfortable with, the fact that we aren’t going to have unlimited demand forever.
We need to drive more housing supply to positively impact housing affordability. We also need to embrace, or at least be comfortable with, the fact that we aren’t going to have unlimited demand forever.
There are several strategies property management companies and owners can employ to both deliver the returns their businesses need and serve their customers without defaulting to raising rent. Before we get into the strategies, let’s acknowledge that the macro headwinds facing the multifamily industry are real, and operators are justified to be concerned. Increasing interest rates are driving up the cost of capital, and so the cost to acquire and hold properties is rising (roughly 75% of financing (automatic download) for multifamily properties is from debt). Property values across the board are softening. Cap rates jumped. These market changes, combined with the developers and owners who bought properties too high at lower cap rates, could mean increased financial risk for property owners.
This presents the industry with an opportunity to examine and leverage other pro-renter strategies to increase their margins without doubling down on rent increases that the market won’t support.
Pro-Renter Strategies To Consider
In a more stable market, the financial forces facing multifamily are mitigated by annually increasing rent. But the old playbook of increasing rent that got us here isn’t sustainable and won’t get us through this. Instead, creating a consistent renter experience, focusing on loyalty and retention and increasing operational efficiency can benefit renters and operators.
1. Operational Efficiency
The multifamily 1:100 operating model, with one on-site professional for every 100 units in an apartment community, is antiquated and inefficient. It doesn’t serve renters or operators well. It asks leasing teams to be jacks of all trades and masters of none, taking care of everything from tours to helping a resident with a leaky faucet to renewals and verifying new applicants’ identities. This burns out customer service-driven leasing professionals on administrative tasks and leaves them feeling overwhelmed or tired before they even begin interacting with prospective renters and current residents. It’s a lose-lose for teams, renters and operators.
Consider rethinking the intersection of technological investments, organizational structure, and operational workflows within your company to create specialized roles for the various portions of the leasing process.
Consider rethinking the intersection of technological investments, organizational structure, and operational workflows within your company to create specialized roles for the various portions of the leasing process. This intentional reorganization allows operators to future-proof their businesses with greater efficiency and provide more rewarding, specialized career paths for their teams. Happier teams plus better results equal a win-win.
2. Consistent Renter Experience
Demand for apartments is decreasing, and vacancy rates are increasing. As such, renters have more choice in where they live and will vote with their leases accordingly. Leading operators are focusing on creating a consistent renter experience by leveraging tools that provide a modern, seamless experience that meets renters where they are.
In my experience, strategies that have solved this for operators include centralization and role specialization, which allow experts to handle each step of the renter journey from inquiry through renewals, particularly detail-oriented processes like leasing applications that don’t need to be done on-site but demand a keen eye from teams.
In my experience, strategies that have solved this for operators include centralization and role specialization, which allow experts to handle each step of the renter journey from inquiry through renewals, particularly detail-oriented processes like leasing applications that don’t need to be done on-site but demand a keen eye from teams. Another option is leveraging a sophisticated AI solution that answers prospective renters’ questions so that they aren’t left on “read” by overburdened leasing teams. Finally, focusing on high-quality customer care for prospective renters and current residents can help set your communities apart.
3. Loyalty And Retention
Moving, or changing your living conditions, consistently ranks as one of the most stressful life experiences (and is usually triggered by another demanding experience, like starting a new job or moving to a new city). If your teams build meaningful relationships with current residents and prospective renters, then you have the opportunity to make moving seamless.
For example, if your renters are planning to stay in the metro, make it worthwhile for them to renew with you. If they’re moving to a city where you have other apartment communities, encourage them to move to an in-portfolio property and reward their loyalty appropriately. Airlines and hotels have rewarded loyalty for decades for the simple fact that it makes good business sense. Multifamily operators who want to combat softening demand and increasing vacancy should take notes from their playbook.
The challenges we’re facing are complex, and it’s important for the multifamily industry to examine how we can steward sustainable growth within the industry and within pro-renter practices.
The challenges we’re facing are complex, and it’s important for the multifamily industry to examine how we can steward sustainable growth within the industry and within pro-renter practices. By focusing on efficiency, consistency and loyalty, we can grow while still supporting our renters and teams.