In the wake of the highly controversial decision by the CDC to extend the eviction moratorium, I have been thinking a lot about the ramifications of the moratorium and its eventual lifing.  How will operators react?  Are we simply delaying a flood of availability?  How will it effect rent levels as that inventory comes on market?  A line of thought that eventually brought me to: 

How has it effected rent levels already and what is the cost to the rest of the Nation’s renters?

To answer that last question, I started to do the math.

A general rule of thumb in budgeting for the multifamily space is to expect about a 4.0% skip and/or eviction rate, or about 1 per month on a 300 unit building.  Certainly not a hard and fast rule but a guideline many use and experience.   Meaning that on a 200 unit property, 8 leases either skipped or were evicted from their residence annually.  Now that may not seem like a lot but let’s build some context here.  As observed from the RealPage lease transaction data set, In 2019 the national achieved renewal conversion percentage was 53.1%.  This means that on our hypothetical property, 94 of the units would turn annually.  Since a lease that terms early is not a renewal, it is safe to assume that 8 of those 94 units that turned were a direct result of either skip or eviction.  That is 8.5% of the turned inventory annually.

OK Andrew, we get the math but why does it matter.

In 2021, the national average renewal conversion rate rose to 55.6%, meaning the annual stock turned on our hypothetical asset dropped from 94 units to 89.   Except it didn’t.  It dropped to 81, a full 13.8% year over year decrease in available inventory to rent. 

How you ask?  

Because all of the inventory that normally would have been turned through the eviction process or renter leaving early are still being occupied by the renter who is behind on their rent payments.  I can’t imagine that renewal contracts are being executed between the landlord and the tenant in that situation and we know they are not being forcibly removed so these units are not in either the executed renewals nor on an availability report.  So while in previous years the inverse of renewal conversion was a good proxy for available units to turn; mid eviction moratorium it is no longer accurate.

Now it doesn’t take a revenue management expert to cast forward the impact of a 10.6% reduction in available supply annually and how that will affect rent growth numbers.  Even operators leveraging manual pricing are seeing 13.8% less on their availability reports and reacting as best they can.  Those who are using revenue management tools are seeing rents move at breakneck paces as the models see a clear imbalance between supply and demand and are reacting accordingly.  Compounding the decrease in supply is a spike in demand, as measured by the number of leads per total units, that is up 35% through the first six months of the year as compared to the first six months of 2019.  In other words, we are in a year of incredibly high demand but also a year of constrained inventory due to public policy.  It is the perfect scenario for aggressive rent growth which can clearly be seen when we look at lease over lease trade out, otherwise known as replacement rents.

The impact?  While the 4.5% of renters who would normally be displaced are able to remain in their homes, a measure that was absolutely needed as the economy locked down, the other 95.4% are taking the brunt of the unintended consequences. 

If we look at year over year asking rent growth in 2019 vs. 2021, the costs of those consequesnces starts to be revealed. 

In June of 2019, asking rents grew 3.06% year over year.  In June of 2021, they grew 6.25%, which is 73% higher than the ten year average of 3.6% annualized asking rent growth.  So with very fuzzy math we can extrapolate the theoretical burden the rest of the renter base is bearing.

Now admittedly, I am not considering the entire SFR marketplace in my estimates, which could easily double the impact, but that is $9.9 Billion in real cost to real people who are getting no assistance at this point.

I remember seeing a post on LinkedIn years ago where an apartment owner was setting the goal to get to a staffing model where he would have one on-site employee per every 1000 apartment homes. 

I also remember thinking he was crazy.  Turns out he was just prescient.

The traditional staffing model of 1:100 is clearly on the way out.  With ever increasing cost burdens of taxes and insurance, the high turnover rate and the lack of available workforce right now, it simply has to.  Operators’ margins are thin enough as it is and the increasing cost of maintaining the current staffing level, let alone the cost associated with a 50% average turnover ratio, are forcing them to compress further each year.  It is an unsustainable relationship.

Fortunately, the PropTech industry has come forward with several solutions to the problem.  Virtual tours, online leasing processes, self service work orders, resident portals, smart home technology, IOT and Artificial Intelligence (just to name a few) are all driving a trend towards the automation of the traditional leasing office.  We now have the ability to run a property completely remotely if we so desire and during the beginning of the pandemic of 2020, several operators found themselves doing exactly that whether they wanted to or not. 

But as we come out of the pandemic lock down, the real question we should be asking is not ‘Can we do it?’  It’s ‘Should we do it?‘

The evidence is clear that our guests want to be able to do business on their terms.  They want to be able to interact with the community digitally.  At any time of day.  Through a smart device and not by walking through the office doors that are only unlocked between 9am – 5 pm.  They want flexibility.  Automating all of the functions of the Leasing Office should both deliver savings for the operator and the experience our residents desire, right?  In theory at least, yes.

But I believe there is also an inherent risk in executing on this strategy – the commoditization of your product.  A completely digitized experience leads directly to a commoditization of your community.  Commodities are easy to abandon or switch between.  Homes are not.

So we face a conundrum – how do we leverage the efficiency that automation and artificial intelligence deliver without sacrificing our ability to build a sense of community?

Because here is the thing, the evidence is also clear that guests want to feel a part of something.  They do not want a box, they want a home.  In a recent study conducted by the Data Science team at RealPage on multiple years’ worth of data generated by JTurner Research and their ORA Score, a clear correlation between online reputation and both resident retention and revenue performance was identified.  To summarize the study (available here) for every point of improvement a property experiences in their ORA score, it correlates to a 3bps improvement in revenue.   Reputation and guest experience matter and you do not build either through a completely digital interaction. 

So what are we to do with this conundrum? 

My opinion is it is time to start rethinking the purpose/function of the onsite team itself.

Back when I was running multifamily properties and during my time leading corporate housing operations, I became known as the ‘Disney Guy’.  My goal was to create as close a ‘Disney Experience’ in my operations as possible.

• I had all of my manager’s read ‘The Disney Way’
• We referred to all of our residents as our ‘Guests’.  Prospects were also ‘Prospective Guests’
• We did not have units, we had ‘Homes’
• I even had an executive (who was also a resident) question the landscaping expense at one of my communities because it was starting to look too good.

So it should not come as a surprise that I think we should take a page out of the Disney playbook.  When automation eliminated the need for paper tickets related to the Fast Pass, Disney did not immediately move to lowering staffing levels, they thought about how those Cast Members could enhance the Disney Guest Experience in other ways.  Then when resources became excessive, they moved to lower their Cast Member count per guest.  Look for the opportunity to enhance first, make cuts second.

The multifamily industry has the opportunity to change the game.  We need to convert the ‘Leasing Office’ into the ‘Resident Service Center’.  Our on-site staff should not be concerned with filling the building but rather keeping the resident base serviced.  If we are able to automate & centralize the majority of the customer acquisition process, the entry of a work order, the monthly rent payment and other mundane interactions, our on-site teams are freed up to focus on servicing the needs/desires of the guests we currently have.  Improving reputation, retention and ultimately, profitability.  This should lead to a staffing model that is lower than 1:100 while also meeting the desires of both our resident base around service and ownership expectations around cost.

We need to convert the ‘Leasing Office’ into the ‘Resident Service Center’

In order to make this wildly successful though, we need to do things differently.  Very differently.  We need to hire for different talent.  We need to set different expectations with both our residents and our teams.  We need to compensate differently.  The physical structure of the office needs to be rethought.  We need a well thought out and integrated self-service resident platform to empower residents to actually self-service.  We need to change the game but now is a great time to do just that.  Change the game.