In today’s Syndication School episode, Theo Hicks shares 6 Multifamily strategies that will succeed in the future. Greg Willet presented the six investing ideas and tactics to implement in 2021. The advice is mostly based on the reaction to the recession that occurred after the pandemic. The first tactic is to focus on the markets that outperformed the national average from a rental perspective. The second tactic, don’t bank on a flight to quality. The third tactic is to explore a low capital value add strategy. The fourth tactic is to test out new operational strategies to determine what works today because what works now most likely did not work before. The fifth tactic: focus on renewals to obtain high-quality residents. The last tactic is to make sure you’re focusing your assets of branding and marketing on lifestyle-related factors such as customer service, appearance, ease of living at the property, location, and less on the actual pricing factors.
Listen to this episode to know more about these six strategies.
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TRANSCRIPTION
Theo Hicks: Hello Best Ever listeners and welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndications. As always, I’m your host, Theo Hicks. Today we are going to continue talking about my favorite presentations from the Best Ever Conference 2020. Today we’re going to focus on Greg Willett’s presentation. He is a chief economist at RealPage, Inc. and he talked about six investing strategies to implement in 2021. Let’s jump right into this.
Obviously, a lot of this advice is based off of the reaction to the recession, or downturn, or whatever you want to call it, that occurred after the pandemic. The first tactic focuses on which markets to target. We’ve had a lot of blog posts talking about the markets that performed the best during 2020, during the pandemic. A really good resource is apartmentlist.com; they update the rents on a monthly basis, month over month growth, and year over year growth. If you take a look at their map, you’ll notice that some of the best-performing markets were all focused on the Sun Belt region.
Tactic number one from Greg is to throttle up your Sun Belt assets. The Sun Belt, if you look at a map, is basically the strip at the bottom of the US, the southern part of the US ranging from Southern California all the way across to Florida. Not every single market in the Sun Belt performed well, but when you take a look at the map, you’ll see a lot of red. Outside of the major markets in California and Texas, and then a couple of other places like New Orleans, Nashville, Orlando, and Miami, basically all the Sun Belt markets experienced rent growths that exceeded the national average of 1.1 in 2020. Some vastly see that number, but others were just in the low single digits, but still very little negative rent growth in that Sun Belt region. So the idea here is to get ahead of that demand by focusing on assets in the Sun Belt markets.
Then the other markets that performed well, but not as well as the Sunbelt, would be the Midwest. Greg says don’t rule out the Midwest either. Outside of again, major markets like Chicago, Minneapolis, and Cleveland, when you take a look at the heat map of rents at apartmentlist.com, you’ll notice that many of the markets exceeded the national average and most of them had a positive rent growth in 2020. The demand here is not as strong as the Sun Belt regions, but Greg said that because of the lower supply in the Midwest compared to the Sun Belt region, he believes this will drive demand in 2021. So strategy number one, throttle up your assets in the Sun Belt and then do not rule out the Midwest.
Break: [00:04:45] – [00:06:47]
Theo Hicks: The next strategy I thought was pretty fascinating – he says don’t bank on the flight to quality. Historically, if you take a look at past recessions, what usually happens is that a recession hits, and then the top tier Class A products will discount their rents. As a result of this reaction, a flight to quality occurs, which means that the lower rents of these Class A products will attract renters from maybe Class B, which will then boost the occupants. They take advantage of the better product at a lower price. But during the COVID-induced recession, these rent discounts happened, but did not result in an uptick in demand that was experienced in the past recession. Instead, the opposite happened – there was not a flight to quality, there was a flight to downgrade. Renters had a tendency to move down from A to B, or B to C, in order to save money.
This trend was obviously expedited by the fact that there were stay-at-home orders. We’ve talked about this on the show before, where a lot of people left the major expensive urban areas to move to less expensive suburbs. That’s why you need to take a look at apartmentlist.com, you’ll notice big blue circles in a lot of the major markets, these top tier primary markets, because of the stay-at-home orders and the closures of businesses.
So overall, since this did not happen, he’s saying don’t bank on that happening in 2021. Don’t assume that class A and Class A plus are going to perform very well from an occupancy perspective because the rents are reduced, because that’s just not the case.
There’s a couple of good studies on a RealPage – that’s where Greg is the chief economist. Just go to RealPage and type in flight to quality. There’s a lot of statistics on what happened when the pandemic hit and how a lot of people moved from A to B and B to C. That’s tactic number two, don’t bank on a flight to quality.
Tactic number three is to explore a low capital value-add strategy. This is kind of similar to flight to quality, but the whole point here is that he recommends not pursuing very large, heavy value-add opportunities. So hold off on doing large luxurious upgrades to unit interiors or adding the fancy bells and whistles amenities, and focus more on lower-cost value-adds like deferred maintenance and then some aesthetic or appearance touch-ups of the property. That way, the asset will be much more affordable to a larger group of renters, keeping in mind that the flight the quality occurs, so people are willing to downgrade. These high-quality apartment communities, according to Greg and their data, are not as attractive.
Another benefit of this is that it will allow you to turn around a vacant unit faster, or keep the existing resident, as opposed to forcing someone out in order to spend 10 to 12 thousand plus dollars on a unit renovation. You can do something smaller, take care of some deferred maintenance, and either keep that person in there or keep that unit offline for a less amount of time. This will obviously boost your occupancy. But what’s key here is it will support resident retention at lease expiration. One of the big things right now is keeping people in your units. By doing an upgrade, that doesn’t force a person to move out, and it can help you with your retention, which will help boost occupancy and reduce turnover.
Another advantage would be, down the line, when you go to sell the property, it’ll be more attractive to a buyer. Once things go back to normal, there’s money on the table to do that more expensive, value-add strategy. Tactic number three, explore a lower capital value-add strategy.
Tactic number four – moving into more operational type strategies – is to measure what is working now. To me, this was kind of obvious, but we’ve actually talked about this on episodes before… I believe I talked about this when I went over the presentation… I believe it was Realty Mogul and the advice of the CEO of Realty Mogul in how they were constantly measuring what was working, and then double down, and then when they did something that didn’t work, they immediately stopped doing that. But the point here is to take a look at some of your operational strategies, things that might have been your secret sauce or what worked in the past, and then make sure that it’s still working right now. That’s basically assume that something that worked really, really well two years ago probably is not the best approach right now. Then confirm that that is true by measuring the results, and if it works, keep it; if it doesn’t work, then adjust it. A big example would be testing out different types of technologies on your property that promote social distancing, and things like that.
Something else to pay attention to would be what young adults are doing and how they are reacting to the pandemic, and in 2021, how that’s going to impact the types of units that are in demand… Because Millennials are the biggest portion of the population as of 2019; they overtook the boomers. Once you know what the millennial generation wants, then you can determine what types of units will be in demand, and then you can determine what type of marketing you need to do in order to focus on those types of units that are in demand. Overall, the strategy here is just to measure everything you’re doing. We’ve got a pretty good KPI performance tracker that’s available at syndicationschool.com that can help you with this process. But basically, track and then measure, see how things are working, and then make adjustments if needed. Again, kind of obvious.
Break: [00:12:45] – [00:13:20]
Theo Hicks: Number five, I kind of already hinted at that, is really focus on renewals. This is one of the strategies I think is very important right now with the pandemic. There’s another good study on RealPage. If you type in apartment resident retention… I think it’s apartment resident retention gets messy. They talk about the large variability in renewal rates across the country. Renewal rate is the percentage of leases that are signing again, as opposed to when the lease expires they leave.
This really needs to be a priority, because you want to hang on to those high-quality residents who are making their payments in full and on time. It might be worth giving some sort of concession – if needed; don’t come off the bat with a concession. But in order to keep someone who’s been paying on time, give them some sort of concession or not increasing the rents as much as you’d want to, or not increasing the rent at all, in order to keep them in the unit.
Something else to pay attention to is the breakdown of renewal rates by unit type. Maybe one-units are experiencing a lot higher turnover, whereas people are deciding to stay in the two-unit buildings more. If you see a discrepancy between the renewal rates for multiple types of units, you need to figure out why that’s actually happening. A really solid thing that Greg said was, “Don’t just focus on the price.” Don’t say “Maybe the reason why my one-bedroom units have a lower renewal rate than my two-bedroom units is because my price is too high. So I’m going to just lower the price and assume the problems will be fixed.” No, you want to focus on other non-pricing factors like maintenance and customer service, Greg said. Those are kind of the two main reasons why people decide to not renew, is maintenance issues aren’t addressed enough, or the customer service at the property just isn’t very good. Overall, the strategy here is to make sure you’re keeping those high-quality residents.
The last tactic that Greg provided was to take back control of your brand. I’ve kind of already hinted at that, but overall, your marketing strategies in your brand for the actual apartment shouldn’t focus on just the price. When you’re trying to attract a resident with your marketing, the main focus shouldn’t be “We’re the lowest priced unit in the market”, or one month of rent half off, or some sort of monetary concession. As I mentioned, that’s not the number one reason why people decide to not renew a lease. It’s also not the number one reason, at least now, why people aren’t deciding to rent. It’s not one of the main factors that people are using to decide whether or not to rent one unit or the other; the focus is more on other non-pricing factors.
So make sure you know who your target demographic is, what non-pricing factor is the most important to them, and then make sure your branding is focused on pumping out that message. It could be customer service-related, so you can focus on why your customer service is the best… It could be just the overall appearance of the property, so you can talk about some new touch-ups you’ve done at the property, it could be just ease of living at the property, all the convenience services that are there. It could be the location of the property… There’s something out there that’s going to track your target demographic more than just the price of your unit, so figure out what that is and then make that be the main focus of your brand.
Those are the six tactics, three of them are kind of overall investment strategies, and three of them are more focused on the operations at your current investments or whatever new investment you’re going to buy. In summary, the six tactics to thrive in 2021 – number one is to focus on the markets that outperformed the national average from a rental perspective in 2022, especially the Sun Belt and the Midwest. I said how apartmentlist.com is a really good resource for that data.
Number two, consider avoiding the top tier Class A-plus and Class A products, since many renters elected to downgrade to class B and Class C in 2020. Number three, instead, consider a low-cost value-add strategy focused on addressing things like deferred maintenance and appearance issues. Number four, test out new operational strategies to determine what works today, because what works now most likely did not work two years ago and vice versa.
Number five, one of the best operational strategies of 2021 is to focus on renewals, to retain those high-quality residents, kind of at all costs, even if it results in not increasing their rent at renewal for a year. Lastly, make sure you’re focusing your assets of branding and marketing on more of these lifestyle-related factors. Again, customer service, appearance, ease of living at the property, location, and less on the actual pricing factors.
That is the advice given by the chief economist at RealPage, Greg Willett. They have some really good analytics and data on their website, so check that out. A lot of the stats or all of the claims I made today are backed up by the stats on their website. I think their website is actually just realpage.com, not RealPage Inc.
That will conclude this episode of the six investing tactics to thrive in 2021, and really beyond. A lot of these things, especially the operational strategies, will apply beyond just this year. So make sure you check out some of our other Syndication School episodes at syndicationschool.com. We’ve got free documents there as well that you can download. I referenced a few in this episode. Thank you as always for tuning in, Best Ever listeners. Have a Best Ever day and we’ll talk to you tomorrow.
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