Multifamily Benchmarking: Why Same-Store History is a Bigger Priority Than You Think
There are several things that make the multifamily industry unique. Some have a direct impact on performance in multifamily benchmarking, as we have learnt as we continue to grow the user-base of the multifamily data exchange. We have often argued that the multifamily industry would do better if standardized revenue metrics were available and as ubiquitous as they are in other industries. That is undoubtedly true, but it’s important to consider the unique characteristics of our industry as we develop the metrics that will improve the industry.
Lease duration in multifamily different
Lease duration is one of the most obvious and important differences between multifamily and other “revenue management” industries. It delivers the double-whammy (to performance benchmarking) of low transaction volumes, and relatively slow-moving performance statistics. Lease duration means that over a given period most units neither have a move-in, nor a renewal. This causes occupancy and rent growth statistics to be inherently somewhat stable.
This is an important detail. In contrast to the hotel industry, which has been benchmarking revenue for decades. Hotel rooms turn over frequently (about every day and a half), meaning the periods over which we measure performance (months, weeks, and sometimes even days) are discrete, and shifts in performance from one period to the next are often large. In this environment we can learn a lot from a straight comparison of a property’s performance to its sub-market over a period of time.
The same is not entirely true of multifamily. Most of the same leases are in place this month as were in place the month before, for example. So the straight comparison of my property to its comps only provides so much insight for a given month. We have found that in multifamily it is the growth in revenue over time that sheds the most light on performance relative to comps. The management of new and renewal rents and expirations cause a property’s revenues to grow or shrink over time. For this reason we have found that the year-over-year Revenue per Unit (RPU) trend provides the clearest insight into property performance.
Year-over-year trend provides insight
The focus on year-over-year performance creates a new and extremely important requirement in benchmarking data: the management of same-store histories. When you benchmark against competitors, nothing is more important than ensuring “apples-to-apples” comparison. With multifamily properties, this includes identifying which properties have stable histories. It wouldn’t work, for example, to benchmark against a group of competitors, some of which were stabilized and some of which were not. That would yield results that were unrepresentative of the market.
Properties’ histories can be “unstable” for a number of reasons. Lease-ups, or properties that have been forced to close for a period usually have occupancies that are too low for comparison purposes. Similarly, properties that have an incomplete performance history (for example because it changed management company or Property Management System) don’t make good comparison properties, for exactly the same reasons.
Same-store histories important
In our role as curator of multifamily performance data, it has long been clear that our most important task is to maintain the largest possible set of same-store histories. It’s no use – for example – having a database that is huge in terms of unit count, if a large proportion of the units are not same-store eligible for any of the reasons given above. But to maintain same-store histories we must first identify when a property’s history qualifies as stable. And we can only identify a property as stable by monitoring its behavior for a number of successive months (jumps in occupancy, for example, are among the most reliable indicators of property stability).
In our ever-changing industry, where properties change hands, managers and systems relatively frequently, it’s often hard to keep track of data quality. Same-store eligibility is so critical to benchmarking that we display it prominently in our property reports. It’s a fascinating characteristic of our industry, and one to which we will return in these pages in the coming months.