Need to know how to price your apartments? Forget instinct. Think data.
Just look at Camden Property Trust. After four years of intensive research and extensive planning, the Houston-based apartment REIT this spring rolled out revenue management– a dynamic, data-driven rent-pricing model– at four Texas properties and one in Las Vegas. The company was committed to the program; after all, it had spent four years planning for it, but the initial results were still staggering. At one Austin, Texas, property, the average number of days vacant plummeted by 10 days, and occupancy rates increased by 10 percent. And at a Houston property, rents for returning residents jumped by anywhere from $35 a month to $150 a month. Delighted by the results, Camden expects to put all of its properties on the new system by the end of 2005.
“We really are on the cusp of a change in the way our industry prices units,” says Laurie Baker, a regional vice president at Camden who was instrumental in the company’s pricing switch. “We have been looking at it [the pricing system] now for four years, and to finally see it working has been the most exciting thing.”
For Camden and everyone else, it has been a long time in coming. For more than a decade, the multifamily industry has explored such pricing systems, which promise to deliver more competitive rents based on market supply and demand and, ultimately, boost revenues. Such systems have long been a hallmark of travel and hospitality companies, who use them to calculate fares for flights, hotel rooms, and cruises. (See “Follow the Leaders,” page 80.)
Revenue management experts say that apartment communities are a perfect candidate for such systems. Why? Because leasing apartments is a high fixed-cost business with time-based transactions, where the value of a given product (such as a two-bedroom apartment with a pool view) changes over time, given what’s happening in the surrounding market, such as mass layoffs, condo conversions, or the arrival of a new corporation– and new jobs– in town.
These market-based and data-driven solutions, often called “revenue management” or “yield management” systems, can analyze supply and demand to determine the best balance between yield and occupancy. “You get pricing that is infinitely more responsive to changes in market conditions because the computer is capable of looking at more dimensions than a human is,” says Jeffrey Roper, who developed such a program during a previous stint at Alaska Airlines.
There are other benefits as well, adds Roper, now president of M/PF YieldStar, which markets a multifamily-specific revenue management system. An automated pricing system “doesn’t take holidays, and it never has an attitude,” he says, smiling.
Leaders, Followers, and Challengers
Despite the obvious allure, though, revenue management systems are just starting to be seriously implemented in the technology-hesitant multifamily marketplace.
That’s because developing a multifamily solution– and getting the industry on board– has proven to be an overwhelming task. Archstone-Smith took the lead in 1999, partnering with software developer Talus Solutions (now Manugistics) to develop Lease Rent Optimizer, informally known as LRO. The industry’s other main pricing system, now called Price Optimizer, barreled through a series of owners before landing in the hands of M/PF YieldStar, a division of RealPage. Both systems have received their fair share of skepticism from an industry known for its wariness toward technology.
Why? Many apartment owners and managers are hesitant to let a machine control pricing. Eric Bolton, chairman and CEO of Mid-America Apartment Communities, a Memphis, Tenn.-based REIT, is fearful of creating “a black box syndrome” where the system spits out a price and property mangers don’t understand or check to see how the price is calculated, he says.
Others question the quality of the data entered into the pricing system. “My only skepticism lies in the fact that the proposed pricing information produced by these systems is only as good as the market variables input into this system, and unfortunately the market information gathered is not always reliable,” says Mark Fogelman, president of Memphis, Tenn.-based Fogelman Management Group.
In the minds of Camden executives, though, the rewards outweighed any potential risks.
And after all, revenue management systems have been tried in industries similar to the multifamily business, says Keith Oden, president of Camden. “Once you understand the principles behind the revenue management model, it is actually very easy to apply to the multifamily business,” he adds.
There certainly would be challenges. Only a handful of multifamily companies have even tried revenue management, and even fewer have adopted the approach. If successful, Camden’s initiative would also represent the first large-scale roll-out of a commercially available revenue management software product designed to be used by the multifamily industry at large, versus a custom software solution created either in-house for an apartment firm or by a contractor for the use of a specific multifamily company.
But Camden was confident that the product’s rollout would go smoothly. Don’t forget, the company had been studying and evaluating the system for four long years.
Early Lessons
Looking for a way to improve its pricing decisions, Camden began exploring revenue management systems back in 2001. It had become too time-consuming and difficult for property managers to manually compute all the factors that determine proper pricing, says Baker. The company selected the YieldStar system, but quickly discovered it first needed to switch to a Web-based property management system to feed the necessary real-time pricing data into the automated pricing matrix. So the company first replaced its DOS system with RealPage’s Web-based system, finally launching the test of Price Optimizer in spring 2005.
Here’s how the software works: The pricing system uses a host of property-specific statistics to systematically forecast supply and demand for a particular unit, pricing it accordingly. Theses stats include the numbers of units currently vacant, current and anticipated future demand, competitive property rents, and marketplace factors such as number of apartment permits and job growth. The database is updated each night, providing on-site staff with a matrix of rents for new leases and renewals by move-in week and lease term for each apartment. (Apartment shoppers who prefer to do their research online can find the same set of ever-changing rents on Camden’s Web site.)
Camden carefully planned the pilot, starting in May at Camden Midtown, a 337-unit property in Houston. “The first 30 days of the pilot, we really hand-held the community, and every day we reviewed the pricing that was coming out of the system to make sure everyone was comfortable and the pricing was acceptable,” recalls Baker. In June, Camden added four other properties to the pilot program, holding conference calls with on-site staff three days a week to review rent recommendations. In that time, staff only rejected the proposed rents twice– once due to an inaccurate market comp and once because the system was not programmed to recognize employee lease discounts.
As the leasing team became comfortable with the pricing system, Camden established a percentage threshold for price variance. “This gives us the opportunity to say within this threshold, we are comfortable with the prices fluctuating on a day-to-day basis,” says Baker. If a price falls outside the threshold, the company’s central pricing authority, Regin Noel, double-checks the accuracy of the price. And the system does not operate in a black box– despite the popular misconception. Property managers can view a “dashboard” that shows all the information involved in generating the rent to see exactly why the prices are being recommended.
Just as importantly, the system requires little training, especially at the site level, says Roper of M/PF YieldStar. “We didn’t build a system that has an expectation that you are going to go out and hire a propeller-head Ph.D. to come in and work it,” he says. “We expect real multifamily people to run it.” Property managers and regional managers at Camden are trained on how to read the pricing system, while leasing agents learn how to sell the new pricing options to prospects. Camden then gives prospects a quoted price and will honor the quote for only three days to create a sense of urgency.
The system is not always an easy sell. Regional managers often resist yield management systems, seeing automatic pricing as a threat, Roper says. It’s understandable: After all, these are the same people who are valued for, among other things, their knowledge of a particular market and ability to price their apartments appropriately– an expertise now being exhibited by a software program.
But Camden’s staff so far has embraced the system, especially its improvements to the sales and leasing process, according to Baker. “Our leasing consultants have felt more empowered and professional in discussing pricing,” adds Dawn Mathwig, a Camden district manager in Houston who tested the system at two of her properties. “With so many options available, they feel they can find a best price to meet their customer needs.”
Dynamic Benefits
The implementation of the new software went smoothly, with many predicted benefits and improvements along the way. But the system also has had some unexpected and dramatic effects on leasing practices at the participating Camden properties.
What came first? The realization that Camden wasn’t pushing rents or renewal rents to where residents expected them to go. “We were raising rents, but we were not aggressive enough in what we really could be getting,” says Baker. So, based on the new system, Camden quickly and successfully raised rents for new and returning residents, upping renewal rents from $35 a month to $150 a month on varying apartments at one Houston property.
At the same time, on-site and corporate staff alike discovered the leasing power of effective rents, even in a highly concessionary market such as Houston. Relying on the new system, leasing agents skipped the “free rent” speech and instead emphasized the “effective rent,” or the actual dollars paid over the course of a year, to new and renewing residents. And it worked. “Our biggest lesson learned is that we can sell without concessions,” says Baker. It’s a lesson that the company plans to share nationally as Camden moves to eliminate concessions across its entire portfolio.
Along the way, Camden and its on-site staff also realized the inherent benefits of the new system. For instance, just as Archstone-Smith does (see “Early Adopter,” page 75), Camden leasing agents can now offer potential residents more flexible move-in dates and lease terms than in the past, with rents that vary accordingly. A new resident could qualify for a lower rent, for example, if they choose a move-in date as close as possible to the apartment’s previous resident’s move-out date. Residents appreciate the convenience, and Camden certainly enjoys the incremental revenue.
But the company also discovered some unexpected benefits: It reduced its average “days vacant” at one property from 15 days to four-and-a-half days because new residents are choosing to move in earlier to get the best price. “We are getting a revenue lift on that alone,” says Baker. “Those are things that we didn’t even contemplate.”
Finally, the new system has also brought significant time savings for on-site and regional staff, who no longer have to hand-calculate rents for new and renewing residents each week. Bill Ramsey, a Camden regional manager in Austin, Texas, estimates that he and his staff are saving three to five hours weekly just at the one property using new revenue management software. “We trust the system,” he says. “We don’t have to sit and look at all the comps and decide, ‘What is this [unit] going to lease for today?’ That is all history now.”
These types of efficiencies for one of the largest owners and managers in the multifamily industry just might be proof that revenue management systems are here to stay. “Clearly the whole industry will embrace it one day,” Roper believes. “It will reach the point where you don’t have a choice because you can’t compete effectively with what is going on around you.”
Of course, only time will tell.
