Jack Callison, president of U.S. operations at Archstone-Smith, remembers exactly how the industry reacted when the Englewood, Colo.-based REIT announced in 1999 that it was moving to electronic apartment pricing. “Everyone scoffed at us,” Callison recalls. “No one thought you could possibly automate pricing.”
Some eight years later, Archstone's original LRO (for lease rent options) system, has since been purchased by Atlanta-based Rainmaker and is in use by Equity Residential, Simpson Housing, Mid-America Apartment Communities, Colonial Properties, and Post Properties, among others who are beta-testing the technology.
Using complex algorithms, revenue management software leverages user-defined base pricing (including available unit options and amenities) against historical market and submarket economic data to calculate the optimal price for any given unit on any given day. Leasing agents will likely tell you that there's no machine that can more accurately price out your portfolio, but Callison says eliminating that type of human emotion is exactly where LRO finds its sweet spot.
“It enables us to make bold pricing moves that frankly may be counterintuitive or uncomfortable at the gut level of instinct for a lot of human beings,” Callison explains. “Human nature fights against pushing rents as high as the market will bear.” In New York, for example, LRO has recommended achievable rent increases of 15 percent to 20 percent where human operators for Archstone were traditionally satisfied with 10 percent jumps.
The RealPage YieldStar system uses a similar algorithm structure, and although only 16 multifamily clients are currently online, RealPage president Janine Steiner predicts an exponential growth in adoption. “This is perceived as a drastic cultural change to the pricing and sales process,” Steiner says, “but the early adopters have proven that the results can be pretty dramatic in terms of revenue growth.”
Callison says dedicated training is paramount in any rollout of the pricing job to leasing agents. “Your front-line associates will always have to have conviction for the product they are selling and the price that they are selling it at,” he says. “LRO is not just a black box that spits out pricing.”
It's also vital for property mangers to continue shopping comps and conducting regular market research, because all of that data can be subsequently dumped back into the revenue management system for further optimization.
Indeed, as more multifamily operators begin to adopt revenue management services, providers such as Rainmaker and RealPage anticipate deeper pools of market and submarket data that will further enhance the reliability of their little black boxes.