Last modified on April 22nd, 2020
By Megan Eales Monroe
To provide you with more tools and support to overcome challenges during COVID-19, the AppFolio team is excited to bring you a new series of in-depth interviews with multifamily industry experts. In the series, you’ll find out how other multifamily operators are adapting and responding to maintain business continuity, while protecting both their residents and team members during this unprecedented time.
In our first episode, AppFolio Sales Strategy Director Tim McInerny discusses renewal strategies, revenue management, leasing adaptations, and more with Donald Davidoff, President of D2 Demand Solutions and a 20-year real estate veteran.
Here are some of the valuable takeaways they cover in the interview:
- “Renewables, renewables, renewables. Right?”
Donald advises multifamily operators to “turn your attention to the back door.” Keep a strategic focus on lease renewals to mitigate any lack of demand for new leases.
- “The reality is, we have the capacity to give more personal attention than we have during normal times.”
If showings and inquiries on vacancies have slowed, leasing associates can take that time to instead proactively reach out to current residents whose renewal date is approaching. That way, you can leverage your team’s time to maximize your renewal rate.
- “Whether you’re small, medium, or large, you don’t want to turn your back on marketing.”
Though it may seem like demand is slowing in the short term, demand for housing will always remain relatively constant. Donald cautions against reducing your headcount in marketing, even if you reduce your marketing spend for now, so that you can hit the ground running immediately when demand inevitably picks up.
- “It may sound trite, “Just answer the phone,” but, honestly, just answering the phone is going to be 50% to 100% better than what your competition is doing.”
To maximize the demand that is coming in, responding quickly to incoming leads can be a significant competitive advantage. While other multifamily operators and their leasing staff are struggling to adapt to the work from home setup, you can leverage an AI leasing solution to guarantee quality responses and follow-up for all prospective residents.
- “It’s always important to communicate, but in times like this it’s doubly so.”
Due social distancing, it’s necessary to cut back on non-essential maintenance. If you communicate clearly with residents they will not only understand this, they will also appreciate it. Don’t simply stop responding to service requests. Communicate clearly with your current residents and you will see better retention rates.
We hope you enjoy the first episode of our series. Our mission as a company is to continue to equip you with the technology and knowledge you need to keep your business running. Be sure to check back in the coming weeks for more episodes.
Tim: Donald, well, it’s a pleasure to have you today. Thank you for your time. I’m excited to talk a little bit more about the state multifamily’s in, and glean your knowledge from the past to help us now and in the future.
Donald: Well, thanks for having me, Tim. I’m looking forward to this.
Tim: And quickly, just for our listeners, do you want to introduce yourself?
Donald: Sure. I’m Donald Davidoff. I’m the president of D2 Demand Solutions. We do high-impact C-suite projects, mostly on the demand management platforms. So pricing and revenue management, sales performance improvement, marketing analytics, customer experience, and business intelligence. So everything customer-facing, which seems pretty appropriate for what’s going on today.
Tim: Absolutely. And you’ve spent a year or two in multifamily, right?
Donald: Yeah, a year or two, in dog years, for sure. I’m probably best known for having led the team that built LRO, the first automated pricing and revenue management system in the industry. I switched sides of the table from the software company I was at, and went to work for my then-customer, which was Archstone.
I had a 10-year career there, ultimately leaving as a senior vice president. I had responsibility then for not just pricing revenue management, but all of marketing, and some business process workflow things we were doing. Then I spent a year in senior living with Holiday Retirement, brought some modern digital marketing and pricing revenue management concepts there. And since November of 2012, I’ve been operating D2 Demand. We’re a boutique consulting shop with seven consultants, really just trying to leverage everything we’ve learned. Especially personally, having been through two recessions in the industry, I’m trying to leverage that to help our clients and others navigate what are obviously some pretty uncertain times.
Tim: That’s really what we’re here to talk about today, understanding the times we’re in. Looking back over your experience in the other downturns that we’ve had, what have you seen?
Donald: Yeah, I guess, I mean, the history lesson, it’s very interesting to me. As this really got to be real to me in early March, I started thinking about it, and I don’t know whether I’m fortunate or unfortunate, but for those of us who’ve been in the business now for 20-plus years, this is the third recession since the turn of the millennia. And they’ve been three distinctly different recessions. I mean, if you look at from after the Great Depression through the 2002 recession, most recessions, or all the recessions in those periods, were really quite similar. They were basically P&L recessions. Just over time, people get over their skis, some trigger happens that causes a bit of a collapse, and you rinse and repeat through those recessions. But they tend to be V-shaped, because the creative destruction that is painful but necessary through a recession, causes the crash… people start buying the remnants at discounts, and build it back up again.
Obviously the great recession, 2008, 2009, was different in that it was a balance sheet recession. So what I mean by that is, the housing market collapse is what triggered the recession. And for the first time in decades homes had big hits to their balance sheets. So the 2002, 2003 recession, and many before, that you might get laid off, but your house was still worth whatever your house was worth. So that being the single biggest investment most families have, their balance sheet was in order, it was their personal P&L statement that was messed up, to use that metaphorically. Obviously 2008, 2009 it was the balance sheet that got messed up, right? People’s savings were wiped out as any equity in their house got destroyed. They actually gave the house back to the bank in droves. So it was just a very different recession, and that’s why it was a much, much slower recovery, because it takes a lot longer to rebuild a balance sheet of personal finances, than to build the erstwhile P&L.
Donald: This one, now, is completely different, because this is an exogenous circumstance. And, in fact, we’ve talked about, blogged about, and even had a webinar, where we use the analogy of the economy as a set of pipes through which water, the metaphorical money, flows. And normally it’s pumping along fine. That’s all the cascading effects. It’s all wonderful. Over time some gunk builds up in the pipes, and that’s what triggers a normal recession. And the government comes in, the fed comes in, and they clean the pipes, things start flowing again.
This recession, in a lot of industries what you’re seeing is the pump has frozen, right? It doesn’t matter how low United Airlines lowers their price, I’m not flying on an airplane right now, because it’s not safe for me to go out somewhere. And so it’s just a very, very different kind of recession when the pump has frozen, as opposed to just the pipes are gunked up a bit.
Tim: Right. Interesting. So when we think of extrapolating what you’ve learned from the other, different recessions, are there any moves that stand out to you, or anything that stands out to you, that we might apply in this recession as being multifamily operators?
Donald: Yeah, I mean, several things definitely stand out. The first is that anytime there’s a recession you immediately turn your attention to the back door, right? Close the back door: Renewables, renewables, renewables. Right? We’re actually fortunate, because most of our customers, most of our residents, are on 12-month leases. Maybe a few longer, a few shorter, but most of them are on 12-month leases. Compare that to poor Marriott Hotels that turns their hotel over often more than once a week. So no matter how bad things are, we do still have most of our rent roll in place.
And so the recession hits the demand coming in the front door, and it can cause some release breaks, there’s definitely challenges on that side. But, by and large, the majority of the effect is on the front door. And so anything you can do to keep the back door closed, mitigates — it doesn’t replace, it doesn’t totally fix — but it mitigates some of that lack of demand coming in the front door.
Tim: So we’re talking about renewals, right? “Heads on beds” is maybe the theme here.
Tim: And when we’re working these renewals, would you have any tips or tricks? I mean, are you going straight for the price lever, and giving a concession that’s just anticipatory? Or what’s that strategy or move that you’re trying to do to minimize the backdoor effect?
Donald: I’m a big Daniel Ariely fan. If anybody listening has heard of him, he’s a behavioral economist. And one of things he talks about in his book, Predictably Irrational, is how a lot of the seemingly irrational human behavior (but quite predictably irrational human behavior) comes from where people are responding in terms of the economic contract, versus the social contract.
And because we offer housing, there is inherently a piece of a social contract in what is otherwise an economic transaction of a lease. And so the reason I bring that up is, what you really have to think about is, in a recession, when everybody gets scared, and they get scared for their livelihood, they go back to the reptilian brain, and the social contract starts to kick in. So what I have learned from past recessions is that you want to get ahead of that.
Landlords automatically start two squares down. I think we’re maybe a little better than lawyers and Congressmen, but not by much. And so the danger is if we try too much to cling to that last dollar before the rents truly come down, maybe you can get away with that, but you’re playing right into the worst stereotypes.
So what we were successful with at Archstone in the past, and certainly D2 Demand has advocated, and even NMHC is out there advocating this, is, “Look, rents are going to come down in a recession. So get ahead of it. Offer flat renewals right now.” Heck, a flat renewal now may turn out to be above market if rents do keep going down. So, at a minimum, it’s sort of socially acceptable. It makes sense to a resident that a flat offer is at least a reasonable one. Even if they don’t take it, it’s enough to start the conversation.
By the way, there’s one lesson we learned back in the great recession, in places like New York City and Seattle… the peak-to-valley rent change was minus-29 in New York, and it was minus-26 in Seattle. What we found there is, initially, you could send out flat offers, and then negotiate one-on-one as you talked to people. But within a couple months it was so obvious, and the press was reporting how low rents had gone, if you sent out a flat offer, that was actually no longer socially acceptable. And literally the residents would not even come in to discuss, they were so annoyed.
So in that situation we actually ended up sending out minus-5% offers. I don’t normally do that, it’s the only time in my life I’ve ever done that. But we sent out minus-five offers, which at least then acknowledged what was going on, and was enough to start the conversation.
So the lesson I would take away right now is, it’s not so bad you have to send out negatives, but I highly recommend sending out flats. Some people will take it, some people will push back. It becomes a starting point for an intelligent conversation.
The other takeaway is, because you’re not getting as many tours, since people don’t want to leave their homes, and you don’t have as much demand coming in, leasing associates can take that time to proactively reach out to folks who are either under renewal, or coming up for renewal.
It may sound trite to go, “Oh, well we have to give more personal attention.” But the reality is we have capacity to give more personal attention than we have during normal times. And so combine the economic transaction of offering a flat renewal, the social acceptance of that, and then the personal outreach, and you can start to have one-on-one conversations with people to understand the situation, and come to a fair understanding.
Tim: I love that. And when we talk about these three elements, the last one being the social element, I think would you agree that a lot of these folks might be semi-starved for a human contact. Being on the phone is good. But would you advocate using a video software?
Donald: Oh, absolutely. Yeah. I mean, FaceTime, or Zoom, or any of those things. Really what I would do is I would reach out and offer the resident the modality, right? If they want to exchange emails, great, we’ll exchange emails. Although if it starts to get a little difficult, and little testy, the urge is to send the email so I don’t have to confront the resident. But when you start to feel that, it’s time to pick up the phone. But I would offer them. If they want email, email. If they want texts, texts. If they want a phone call, phone call. If they want to FaceTime, I’m happy to FaceTime.
Again, I think, anything you can do to just cue that you care about the resident, and you want to communicate with them in the way they would prefer to be communicated with, that’s just one more little social signal that you’re trying to be on their side, or at least you’re trying to be fair.
Tim: Sure, sure. Well, you’ve talked a little bit about the front of the house, right? So, inbound. We know that has been drying up. At AppFolio we’ve been tracking that. Most of our clients aren’t seeing as much traffic as they did. However, what’s neat to me is, to use your metaphor, if I can, “the pump is still pumping.” We’re not totally frozen up like in other industries.
So is there anything you can pull out from past experience to help us maximize and attack the demand we do have coming in the front door?
Donald: Yeah. Sure. So the first thing I would say is, I’ve been doing a lot of anecdotal surveying, and talking to a lot of people, and then looking at actual data with clients we have. And what is interesting to me is there are places that really are in a situation where the pump has seized. And that’s mostly California, New York, urban corridors, or your central business district kind of places. You’re absolutely right in the suburban markets, and then particularly in the secondary and tertiary cities, there may be 40%, even 50%, declines in demand, but it’s far from 100%.
And so in those situations the pump has not frozen. In particular in those worlds, what I advocate really is back-to-basics. You want to look at which marketing is still driving leads and continue to support those… despite the urge to cut marketing people, or whatever agency you’re using.
I will tell you I’ve heard from a couple of sage veterans tell me coming out of 2010, 2011 that the only mistake they made in 2008-09 was they felt like marketing was an easily cut expense, and they laid people off.
And, as a result, when the recovery came, they were left starting from less than zero to get going again. Whereas, some of the larger REITs who kept their marketing team intact, though they may have cut some of the marketing channel span, those guys hit the ground running. So whether you’re small, medium, or large, you don’t want to turn your back on marketing. You want to be judicious where you cut.
Tim: And so you’re advocating keeping more of the people, but optimizing your spend.
Tim: So lighten up on ILS fees-
Tim: …And then continue to maximize the demand you do get.
Tim: Where I’m going with this is, I think we know that leasing agents are notoriously not great at answering 100% of phone calls in-office. Now we’re working remote, we have probably phone service challenges, we have all these things. I would assume that we’re probably still not hitting 100% of answered calls.
Donald: No. In fact, yeah, you’re going exactly where I was going, which is, it may sound trite, but it really is true, you can only increase lead volume so much, so it’s all about the execution, right? Are you getting in front of that lead, immediately, within five minutes, not within 24 hours, within five minutes? One of things I love about Lisa as an AI solution is that it guarantees that you’re right there, right when the prospect is asking, and 100% of the time the prospect’s at least being addressed.
Sharpen your sales skills. I’m a huge fan of the use of CRM tools. I’m a huge fan of call centers, if you don’t have the AI solution in place. One of the interesting things is, one of the major call centers that I know well actually published a blog, at least in the first two weeks after March 15th, which was when it kind of really hit the fan. They have a missed calls product. They typically answer about a third of the calls to an operator who’s on missed calls. That is, their agents pick up the calls two out of three times.
In the two or three weeks following this really becoming a national thing, and all the work-from-home stuff, they saw a spike of double the call rate from missed calls. So, basically, you would think while they’re at home, they don’t have anything else to do. I don’t know how much of it was startup noise around working from home, I don’t know how much was other distractions, but, at least in the early days, all of a sudden, two out of three calls were not being answered.
So, again, it may sound trite, “Just answer the phone,” but, honestly, just answering the phone is going to be 50% to 100% better than what your competition is doing. And that’s just a critical, critical thing to do.
Tim: Right, right. Well that’s great. I appreciate you sharing that. You also said that you might’ve seen some other areas, or you might have some other key lessons learned… What else really stands out to you as lessons learned?
Donald: Okay. I’ll talk a little bit on the demand side first, and then maybe I’ll come back to that maintenance comment. One of the key lessons we learned is the importance of pricing at the unit type, or at least the bedroom-count level, and not just going, “Oh, my occupancy’s down, my availability’s up. So lower all the rents by X percent, or by Y dollars.”
One of the things that typically happens in a recession is, people who are moving out, especially for affordability, often either move into their parents’ home, in which case they’re lost from the rental pool, at least for a while, or they double up, and so they end up in roommate situations. And so we saw, both in the 2002 and the 2008 recession, that by having a pricing approach that looked at the unit type, not the community level, we had many places where the two-bedrooms didn’t do nearly as badly as the one-bedrooms or the studios. In fact, in some cases, the two-bedrooms even saw an increase in demand. Now these are two-by-twos, right? Two-by-ones are lousy roommate floor plans, so that doesn’t count. But, absolutely, I expect that you will see the two-by-twos, if not grow, they will shrink less than the ones and the studios. And so that’s something to leverage.
On the service side, it’s interesting. In the past during recessions, the idea was to put more emphasis into the service team, and make sure we’re responding really quickly, because that was part of how you protected renewals, right? It was all about renewals, as we chatted about earlier. This recession, what I’m finding is interesting and very different is, at least for the stage where it’s a public health crisis, not just an economic crisis, actually, most operators are communicating with residents that, in the interest of their safety and the employee safety, they’re only handling emergency, or licensed safety issues. Normal minor things like a door hinge problem, or a leaky faucet, or whatever, many of those are either left to the resident to take care of themselves right now, or, in some ways, are being deferred.
So it’s interesting and ironic, we’re actually cutting back on service standards, but most residents understand and appreciate it, because it’s for obvious health and safety reasons.
Tim: Yeah. They don’t want people in their unit to get sick or to give sickness… So it’s a little bit, that’s one of the places where because this is so different, candidly, the playbook we had on service in 2008 doesn’t apply today, because the rules of this particular situation are so different. But I do think the rule that has applied for everyone is communicate, communicate, communicate. Right? So if you just stop doing some of those service requests, and don’t communicate upfront the why, well, you’re going to upset people, and you’re going to make it harder to hold on to them. If they don’t leave during the recession, or during the health crisis, they will certainly leave as soon as the health crisis portion of this is over.
Donald: So if you communicate up front, multiple times, through email, through signage, and then, individually as requests come in, and explain the why, the vast majority of residents are going to be understanding. So it’s always important to communicate, but in times like this it’s doubly so.
Tim: Okay, so COVID-19, everyone’s is talking about it, we get it. Let’s look ahead. In your crystal ball, and your world, what happens once COVID-19 as a problem abates? What are we left with in a macro economy in your perspective? And then, what does that mean for our industry?
Donald: Yeah. So crystal ball gazing is always difficult. There’s so many different variables, but I would say there’s a couple or three different scenarios in my mind right now. Scenario one is, the virus is seasonal. The shelter in place orders are working right now, as of today. It seems to be happening, we’re starting to see some flattening of the curve. And so if all that goes well … Oh, and the government continues to support workers, small businesses, et cetera, as they did initially with the CARES Act, and they’re already talking about the next round. So if all that goes well, the best case scenario is everything sucks through May, and sometime in June, July at the latest, we’re all allowed to feel safe getting out, things start to rev back up, and we have a mostly V-shaped recovery.
I say mostly because there’s a lot of things, there’s a lot of damage that’s already been done that’ll take a little while for people to recover from. And there are things, especially in the travel, and hospitality, and restaurant world, where it’s just not going to come back immediately. It’s going to take a while before people start traveling, business travel will probably even lag… there’ll be some amount of pent up demand, but it’ll still be in waves when it happens… So that’s the best scenario.
The worst case scenario is, you look back at the Spanish Flu, 1918 to 1919. What you have is, okay, things get a little better in the summer, we start to open up for business, and then all of a sudden in the fall, or late fall, early winter, the virus comes back with a vengeance.
I don’t know whether people will see it coming, and because of how badly we handled it this time, they actually get ahead of it, or whether people are so exasperated that some people ignore it. But the chance of a W, the chance of some gain for some small number of months, and then all of a sudden we’re right back at this again, is very real. And I think any business leader, it’s incumbent upon them to put plans in place today, learn the lessons from the last few weeks, in the next couple months, that if we’ve got to do this all over again starting October, November, December of next year, forewarned is forearmed. So it could be that bad.
I mean, until we get herd immunity, either through 70% of the population having the disease, or vaccines, obviously vaccines are the more likely one, and I’m not a biologist, but everything I’ve read would say we’re probably 12 to 15 months away from a vaccine, best case scenario. So I hate to be a Debbie Downer, but we could be at this all over again come, call it, November or December. We’ll see.
Tim: So it is prudent to have a good business strategy around this.
Tim: We talked today about delighting your residents as much as possible through increasing communication, and making sure that the major maintenance requests are taken care of. Getting back to inbound demand as quickly as possible, because your competition isn’t doing it, and if you are, you’re probably going to at least keep your communities more full from an occupancy perspective. And renewals.
Work renewals, over-communicate, pass along flat increases, with then negotiation power to go lower, but you said as a one-off. And keep your base intact. Anything else you’d add?
Donald: That’s all a good list. Again, I would watch and monitor, if there are any markets where the declines get so low that even a flat offer would actually not meet a social contract, then be prepared to do that. But the last couple of things for larger operators that have enough units to care about lease expiration management, think ahead. Right? Lease expiration management is meant to optimize or reduce vacancy loss by lining up expirations with demand. At some point, if your occupancy gets low enough, any piece of demand is good demand… because you’re going to have vacancy a year from now anyway. So think now, soberly, when would the time be to turn off, or stop worrying about, lease expiration management, and you’ll fix it after the crisis. And then for anybody, I would also just review your long-standing vacant protocols to make sure they’re appropriate for what the situation is. Right? Some companies, even some revenue management systems, start automatically reducing price on units when they go vacant.
But if that’s driven by lack of demand, that’s not the reason to do that. So I’d relook at my long-standing vacant protocols. If you do have vacancy pile-up, extend your hold times. Right? Normally I wouldn’t let a vacant unit be rented for anything longer than 10 to 14 days from now, move in. But if I’ve got a bunch of them, it doesn’t hurt me to let somebody, if they really want that unit, wait 21 days, or 30 days. It’s not like I’m just slicing demand.
Tim: Would you do any kind of amenity audit?
Donald: Yeah, actually, the last thing I was going to leave you with is, I would highly recommend doing an amenity audit. Any unit that is mispriced, because the amenities are mis-assigned, needs to be addressed. If you’re pricing too low, you’re leaving precious dollars on the table. If you’re pricing too high, you’re actually increasing your vacancy loss, because of bad amenity setups.
And the other thing I would do is take a look at the amenity price. Look at your exposure, and is the exposure skewed? Is the availability skewed to the higher amenitized homes? One of the things that we definitely learned in 2008 … In 2007, the height of the bull market, in Washington DC, we were getting 150 bucks for large walking closets in one of our mid-rise buildings. Turn around just 12 months later in 2008, we were lucky to get 50 bucks for it.
So in good times people feel flush, they will spend for those luxuries. The minute they become tight, the price sensitivity on the extras ratchet it up really, really high.
The first thing you cut is, “I’ll let go of the large walk-in, and move to a smaller unit, but I don’t really want to leave the building if I can help it.” Whereas in the past, “Hey, I’m doing well, economy’s well, I’m feeling great, it’s only going to get better. I want the best possible home there is.” And so the price sensitivity at the margin changes an awful lot, and amenities, unit amenities, that used to be worth a lot suddenly aren’t worth so much. And the companies that responded to that quickly outperformed those who were slow to respond.
Tim: Well, Donald, I appreciate it. I have one more question for you, then I’ll let you go today. Coming back to lease expiration management, would you have a perspective that changes, and start offering longer term leases than you typically, obviously you go for the year, but would you go 18? Would you even offer 24 months at this rate?
Donald: Yeah, in situations. I mean actually, even more than the last recession, think that may be a good idea. Go back to the fear that this may come back with a vengeance, and we’re doing this all over again less than a year from now. In the great recession, it was still an economic, a purely economic calculus, and once we started to recover, we actually, in places like New York, it did recover pretty quickly.
The thing here is, if I’ve got somebody moving in now, do I really want to have a renewal challenge a year from now? If we are back in this, it’s possible that prices will be lower a year from now than they are today. So I would definitely consider that. It’s not wrong to stick to 12-month leases. Right? It’s a risk judgment, which I always like to ask myself, anytime I’m trying to make a decision, ‘Well, okay, two years from now, looking back, would I be more upset that I left some money on the table, because if I had done one year leases, I could’ve gotten a 4% increase, and I gave them a flat rate for 24?’ Or would I feel worse that, ‘Oh crap, I really ended up having to reduce people’s rents in order to keep them in, because I didn’t give them a 24 option?’”
And people of good conscience will disagree, will have different opinions of which one would upset them more. So I would use that as a razor. I would ask myself if I was an owner, “Which one would make me more upset?” The chance of nailing the answer is pretty small, because the world’s incredibly uncertain. So if I know I’m going to be wrong, I ask myself, “Well, given these two choices of which way I’m wrong, which one would upset me more?” And the one that upsets me less, that’s the one I’ll do, because that’s the risk I’m more willing to take.
Tim: Right. Well, Donald, I really appreciate you, and I thank you for your time today.
Donald: Oh, thank you, Tim. That was fun.
Tim: All right. We’ll talk with you soon. And how do people get a hold of you? Do you have a website?
Tim: Fantastic. Thank you so much.
Donald: So best of luck to everybody out there, you’re giving a great service providing housing, and we’ll all get through this together.
Here are a few links to check out the content and resources mentioned in this episode: