For more information on multifamily revenue management, check out our help article explaining what revenue management is or this page on our LiquidRent.ai multifamily revenue management system.
The Drawbacks of Multifamily Revenue Management
Revenue management is used by property managers and owners to optimize rental income by setting rental rates based on various factors like market demand, seasonality, unit type, and historical data.
While many in the multifamily industry find value in these systems, critics argue that there are several drawbacks:
- Dehumanizes Decision Making: Relying solely on automated systems can remove the human touch from decisions. Personal circumstances of tenants, like a loyal tenant requesting a slightly lower rent due to financial hardships, may not be considered.
- Inaccuracy in Predictions: No system can predict market changes with 100% accuracy. Economic downturns, local events, or unforeseen circumstances can quickly change rental demand.
- Potential for Discrimination: If not carefully managed, these systems can unintentionally promote discriminatory practices. For instance, if historical data show that certain demographics default more on rent, the system might suggest higher security deposits or rents for them, leading to discrimination.
- Tenant Dissatisfaction: Frequent changes in rental pricing can frustrate and confuse tenants. Especially if neighboring units have vastly different rents for similar amenities, it can lead to dissatisfaction among residents.
- Implementation and Maintenance Costs: Installing a revenue management system can be costly, and it requires regular updates and maintenance. Not all multifamily operators may have the resources to invest in such a system.
- Short-term Focus: By focusing on maximizing revenues in the short term, some systems may overlook the value of long-term tenant relationships. High turnover can be costly in terms of unit turnover costs and vacancy periods.
- Complexity: For smaller property owners or those new to the industry, the complexity of implementing and understanding a revenue management system can be daunting.
- Over-reliance: If property managers rely too heavily on these systems without using their judgment or understanding the local market nuances, it can lead to poor decisions.
- Market Perception: If the public perceives that a property is constantly changing its rental rates to exploit demand, it might damage its reputation in the market.
- Potential for Algorithmic Collusion: Algorithmic collusion refers to a situation where algorithms, typically used by competing businesses, inadvertently or intentionally coordinate their actions in a way that mimics collusive behavior, even without direct communication or explicit agreement between the companies. This concept is particularly relevant in the context of pricing algorithms and has garnered significant attention in the field of antitrust and competition law.
Despite the potential downsides, many property managers and owners find these systems beneficial in optimizing rental income and occupancy rates. The effectiveness and appropriateness of multifamily revenue management depend largely on how it's implemented and used.