An Open Letter to The Chicago Class A Multifamily Industry
August 7, 2020 | By Aaron Galvin

Clients, Friends, and Colleagues,

Over the first three and half months of the COVID-19 pandemic, we saw the Class A multifamily market remain surprisingly strong during this unprecedented time. In Chicago, mid-March through June is consistently the busiest period for apartment leasing. The timing of the pandemic and its economic impact had the potential to derail apartment leasing in 2020. However, as an industry, we all banned together to share stories, strategies, and sentiment on how to ensure success during this crucial period.


For many, the results were positive. Collections remained at pre-pandemic levels. Leasing activity was steady albeit slightly muted compared to what could have been, and pricing stayed relatively status quo at an estimated 5% decrease year over year through June 30, 2020. Yes, there were added concessions, but nothing that had a long-term impact on the fundamentals of the industry.


Equally as important, we become innovators: learning new ways to manage teams, communicate, and provide the professionalism and service our renters deserve. We adopted technology such as self-guided touring, virtual leasing, and enhanced AI-powered messaging, years earlier than this industry would have otherwise. Today, we are positioned and ready for the inevitable return to virtual leasing. And the reward was occupancy, arguably the most vital metric used to measure the health of a multifamily asset. Most properties who had adopted all of the above and worked tirelessly through the pandemic were able to maintain occupancy levels in the 90%+ range, which was exponentially better than nearly every other asset class in real estate.


Unfortunately, that time is over.


July 2020 was the single worst month I have seen in my seventeen years in this industry. We saw rent prices plummeting to pre-2008 recession levels. Occupancy levels are hovering in the mid-80s, but I have had many conversations over the past few weeks with properties who have already dropped in the high 70s and even 60s. Broker/locator commissions have increased to 150% of one month’s rent and some are starting to offer 200%…and it’s only early August.

To give you an indication of just how far we have fallen, in August of 2019 we ran a comp study including the newest and most upscale multifamily properties in the city. The average net PPSF of that comp study was $4.07 PPSF. At the turn of the month, we ran that same comp study and the average net PPSF for those same comps was $3.59 net PPSF. This is a 12% drop year over year at the very top of the market. If the pinnacle properties in our market are performing this way and offering studios as low as $1,450 and 1 Bedrooms sub $2,000, the rest of the market will have to follow suit. And that is exactly what occurred in this very short period of time in July—unprecedented rent drops, no meaningful increase in leasing velocity, and no telling how far this will go on.


How Do We Make It Stop?


In order to fix what is obviously broken, we need to look at the main culprit: dependency on revenue management systems (i.e. Yieldstar, LRO and RentMaximizer). For the last decade, multifamily has blindly adopted revenue management as the panacea to an industry short on capacity, creativity, and loyalty. Adopted from the hospitality and airline industry, multifamily revenue management follows the same principles as industries where the average “stay” is 4 hours on an airplane or 2 nights in a hotel. How can those same fundamentals help set pricing for the single most financial decision in someone’s life––where they choose to live?


Last month, I had a conversation with one of my developer clients who was so surprised by “how much turnover there is in staffing multifamily, especially during this time”. My reply back was to examine the amount of turnover within the properties and think about how many people are choosing to leave their apartment each year and why. Multifamily is the only industry of this scale where we need 40-50% acquisition annually to replace those who have decided not to continue “using the same product”. Each interaction with a renter can weigh on leasing and property management professionals.


It starts with the initial conversation where a leasing agent has no training or justification for why an apartment is priced the way it is. Moreover, they cannot adequately explain why deciding on a 14-month lease will save a renter $300 per month. And even worse, if that same renter comes back the next day, that apartment can be $300 less, even though they were ready to pay $300 more the day before. Yes, the leasing agent makes a sale, but how can they be confident/proud of what they are selling if they have no understanding of how the system works? Follow that with the renewal conversation at the end of the lease term where most likely a different leasing agent or manager has to convince a renter they should not move three floors up in the same tier, even though the exact same apartment is priced $500 less than their renewal offer. Think about that experience for our teams and tell me this is the best way to run multifamily buildings. Moreover, think about this from the renter’s perspective. Can they trust a system constantly in flux? This is what’s happening en masse in our buildings right now, and it’s finally caught up to us.


Why Now?


For the past two years, I have studied revenue management and its impact on pricing and expiration schedules in Chicago’s Class A multifamily properties. While I could not have predicted the pandemic, I have been sounding alarm bells for why this is such an inadequate system to help manage these multimillion-dollar investments. Here are the four aspects of revenue management that are currently broken:


Bad Data In/Bad Data Out


In order to set pricing correctly in a revenue management system, you need an extraordinary amount of data. While establishing “amenity or upgrade” pricing is relatively arbitrary, there is some precedent for how much a renter is willing to pay for a balcony, lake view, or upgraded closets. However, with all new apartments featuring washers and dryers in-unit, hardwood flooring (or similar), upgraded kitchens, and baths, it has become increasingly difficult to find differentiators between luxury apartment buildings. Additionally, the wide range of neighborhoods renters explore versus the comp set that only captures properties in the subject property neighborhood is limiting. LLCR data shows renters look at an average of 3 neighborhoods before deciding on an apartment. If we are only monitoring properties in close proximity, we are missing the majority of comps renters are touring. And finally, while revenue management systems seek granular data at a floor plan level for all major comps, it is rarely accurate, which leads to little or an incorrect variance between floor plans with the same unit type within a building. LLCR data over the past 3 years shows that 65% of renters select “floor plan” or “neighborhood” as the most important factor when deciding on an apartment. Revenue management fails on this front nearly every time.


The Wrong Leading Indicators


It’s easy to see how initial (or even updated) inputs can incorrectly price an apartment, however, an equal issue of magnitude is the lack of correlation between leading indicators such as website traffic, leads, showings, and applications. At LLCR, we rigorously track data to ensure we can accurately predict how and when to increase prices during a lease-up or on an ongoing leasing assignment. Rather than looking at occupancy trends, we focus on the amount of website traffic, where it’s coming from, and how many leads we are getting on a weekly basis. We know from experience that for every 100 leads, you can expect 50 showings, which results in 12 applications and 10.5 rentals. We have tracked these metrics across 40+ different leasing assignments and over 15,000 Class A apartments leased in Chicago over the last decade. This is the most important metric to determine if pricing is correct.


In a revenue management system, the most important metric is occupancy. As 30/60/90 day trends start to suffer, revenue management systems start to lower pricing on both new leases and renewals, giving little credence to the aforementioned ratios. In turn, as pricing starts to drop, savvy renters recognize there may still be an opportunity for lower prices and will wait until they absolutely have to make a decision. That is EXACTLY what is happening right now. As rents continue to drop, renters do not believe we have hit the bottom and they are NOT wrong. Having reviewed many rent rolls over the years, July and August are the two most confusing months for multifamily in Chicago. While the sun is shining, pools are filled with renters (hopefully socially distanced this year), and the city is in its prime, 75% of all Chicago renters have already selected their apartment or have been researching the market for at least the last 30 days. When these price drops occur at this time of year, the savvy renters are simply waiting for the best deal. That’s also why we are seeing the time from showing to lease start date compressing dramatically right now. Renters move faster in the second half of the year, and this would be to our advantage if properties were priced correctly.


Expiration Schedule Management


Chicago experiences the MOST seasonality of any apartment market in the country. Thus, the single most important metric to increase the pricing on a stabilized building is the expiration schedule. In a normal market, we have consistently seen rent increases of nearly 15% between mid-March until the end of June. With demand also at its zenith during this time, this is the best opportunity to raise rents on new leases and renewals.


That said, for most Class A multifamily buildings, the majority of expirations occur between July–September. This is a fundamental disconnect in supply and demand caused by the dependency on revenue management. As mentioned previously, data using LLCR website traffic and lead data from on our brokerage and exclusive property websites, by July 1st, 75% of renters who currently live in Chicago have either found a new place to live or have started their apartment search in earnest. However, from the data we have pulled on many Class A stabilized buildings in Chicago, only 40% of expirations occur prior to July 1. That 35% imbalance, coupled with a lack of relocation traffic due to the current pandemic, is at the core of the challenges we are facing right now. During Q3 through September, more people are moving out of their apartments, and there simply are not enough people to fill those spots. If expirations would have occurred in April–June, we would still be within balance when more people were in the market looking for apartments. This is a function of the “flexible lease terms” offered by revenue management systems that even today are offering 14–16 month leases which will leave expirations at the worst possible time come 2021 onwards.




To best understand how a savvy Class A renter views apartment inventory, think about some of the most successful companies and their luxury consumer experience: Apple, Tesla, and Peloton, for example. What is the common theme? Limited options. One of the biggest challenges facing multifamily is the sheer number of choices we are giving our renters WITHIN a property. With over 50 new buildings and 25,000+ new luxury apartments delivered in Chicago since 2013, the renter has choices. However, when each of those properties puts 60+ apartments on the market at the same time, we have now added nearly 3,000 choices for consumers at a time where the decision-making process has been made exponentially more difficult because of the way people have to navigate life at this moment. Not to mention, the 3,000+ new units that have already been delivered in 2020. Revenue management systems combined with templated “set it and forget it” websites encourage properties to market units as soon as they become available and share all inventory with renters. At LLCR, we limit our published inventory to an average of 20 units regardless of the availability at the property. This is enough inventory to drive the traffic needed to hit our proven leasing ratios and allows our leasing team to engage and up-sell the renter, oftentimes offering them something they did not even know existed. When you can surprise and delight someone with something unexpected, it is a far superior consumer experience.


How Do We Fix It?


Like so many things during this pandemic, there is no quick fix. This is a fundamental issue with our industry that will take years to fully rectify and unfortunately, significant property value has already been lost. That said there are a few things we can do RIGHT NOW to help stop the bleeding and get back on track:

  1. Turn off the revenue management systems! If an autopilot was taking down the plane, the pilot would take over. As described above, the “computer” does not have the historical data, inputs, or knowledge to handle the current environment. Property managers and/or leasing agents are going to be better at pricing right now than any revenue management system.
  2. Focus on lead to showing and showing to application ratios. If a property has 100 leads a week but only 15 showings and 2 rentals, something is wrong. The interest is there right now because moves have been delayed, pricing is lower than normal, and people are starting to make longer-term decisions even without clarity about the pandemic. If we keep lowering and raising rents each week, the market will remain paralyzed, and by the end of August, the demand will be gone.
  3. Stop offering 14–16 month leases. I have already demonstrated how in a normal market the ability to increase rents occurs greatest from March–June. 75% of Chicago renters will have decided or are already in the market by early July. If we have even more apartments becoming available in October – December of 2021, this pain will continue for years. A 10-month lease is better than a 14-month lease at this time of year.
  4. Limit inventory. Do not put every apartment in your inventory on your website. Right now, Class A renters are faced with 3,000 additional choices. If occupancy drops by another 10%, that means we will add another 2,000 units by the end of September, heading into the slowest time of year. And let’s not forget the focus of our country is going to turn to the most important election of all of our lifetimes and continued efforts to move past the pandemic. We have to be better salespeople and help the customer make an informed, seamless decision. Otherwise, they will remain paralyzed and prices will continue to drop even more, permanently impacting the value of these extraordinary properties.

I recognize this is not pleasant news to hear and will take a Herculean effort to reverse the course. However, I look at my role as a thought leader in this industry to provide the truth about what is happening and offer solutions on how to fix it. If we can make a few incremental changes over the next 60 days, we can help steady the ship for calmer waters ahead.


As always, if you want to have a discussion, brainstorm, or consider engaging LLCR to help with your marketing, pricing, and/or leasing strategy, I am always open to a conversation.


With respect for the industry I love,

Aaron Galvin

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