When Chris Lynn, director of pricing at Memphis, Tenn.-based real estate investment trust Mid-America Apartment Communities, started beta-testing revenue management software in July of 2006, he encountered skepticism from some of his onsite personnel. One of his best property managers had serious doubts about the $50 rent increase the software recommended for a community in Greenville, S.C. “She called me up on a Friday afternoon and told me, ‘Listen, Chris. I’m sorry. But there’s no way anyone is going to pay that much for that apartment,’” Lynn recalls. “Then, on Monday morning, she called me back and said she had to eat her words. Somebody actually came in over the weekend and leased the unit at the new price.”
Fast forward to the present and the revenue management success story at Mid-America, which owns almost 40,000 units across the Sunbelt, is becoming commonplace in the multifamily industry. As more owners and managers implement revenue management software, which evaluates market conditions to set rents and terms for a given unit, many are seeing an immediate impact on the rents they’re able to charge, often to levels they never imagined possible. Used in the airline and hospitality industries for years, the technology also is good at determining lease prices and terms in the apartment business.
Industrywide, firms using revenue management programs such as LRO from Rainmaker Group and M/PF YieldStar from RealPage have seen “revenue lift” of 1 percent to 3 percent; some companies have seen even more dramatic results. “In our Florida markets, we let the system push as hard as it would go, and we saw increases as high as 20 percent,” says Jamie Teabo, senior vice president for management at Atlanta-based Post Properties, which began implementing LRO in April 2006 across its 21,189-unit portfolio. “Left to our own devices, I can assure you we would have never pushed rents that hard. That was a big number.”
Indeed, such big numbers have forced multifamily firms of all sizes to reevaluate their operations. Now, many believe that revenue management will eclipse the metrics currently used to determine the financial well-being of a property and turn the multifamily profit formula on its head.
Out With the Old
In addition to all of the profit boosting fanfare, observers say revenue management technology is affecting more than pricing and lease terms. In fact, it’s causing operators to reconsider the fundamental benchmarks of success at their companies. Case in point: While “keeping the heads in the beds” has always been a multifamily maxim with plenty of subscribers, industry veterans now say given revenue management’s ability to accurately predict when to push rents—and when to hold back—occupancy alone is no longer the dominant benchmark.
“My generation grew up worshipping the occupancy gods. We learned that if you were not 95 percent-plus occupied, the asset was failing. But that’s not necessarily true anymore,” says David Hannan, senior vice president at the Morgan Group, a Houston-based developer which grew revenue 5 percent above expectations when it implemented YieldStar at a Class A community in Houston’s Midtown area. “This totally turns the industry upside down.” Instead, operators are now looking to another number—the overall revenue generated from a property, whether it’s fully occupied or not.
“Now, rent growth and occupancy are co-equals,” says Donald Davidoff, group vice president of strategic systems at Englewood, Colo.-based Archstone, which helped develop LRO and is hailed as the earliest multifamily adopter of revenue management, having first tested the technology in 2001. Davidoff points out that Archstone, which owns more than 80,000 units nationally, no longer includes such traditional yardsticks as gross potential rent or loss-to-lease in its financials. “We’ve gotten rid of those old adages because now we can look at each situation on an individual basis,” Davidoff says.
At Greenwood Village, Colo.-based Laramar Group, which uses LRO to price the 20,000 units it manages or owns nationally, CEO David Woodward says revenue management is creating a new truth paramount to understanding multifamily investment today. “Investors always want to know what your occupancy is, but that’s not really the question anymore,” Woodward says. “Now, you’ve got to think in terms of economic occupancy—a number that [backs out] any concessions given, any rent that’s below market, or any delinquencies that you haven’t collected. That’s what the industry should be asking but never does.” Of course, by looking at total revenue generated, that’s exactly what revenue management measures. Many users point out that it has also removed concessions from their markets because the price the program generates is the price offered to the prospective resident.
Other traditional measures of a property’s health—such as low turnover rates—are also being challenged. In fact, operators now say some turnover may be a good thing. At Camden Property Trust, the Houston-based REIT that owns more than 62,000 units nationally, CEO Ric Campo says his turnover rates increased around 15 percentage points in 2006 after implementing YieldStar. (An early investor in YieldStar, Camden was part of the ownership group that sold the technology to RealPage in 2002.) Yet, within a year, overall same-property revenue growth came in at 7.4 percent.
“What we found was that driving our turnover rate up actually captured additional revenue,” Campo says, adding that while turnover expenses went up by $2.5 million, revenue increased $12.5 million. “The net effect of driving revenue and pushing people out was $10 million in income,” Campo says. “I think that shows keeping the heads in the beds above all else is not always the best strategy.”
In With the New
With those kinds of results, other operators say it’s time to start looking at underlying profit drivers from a different perspective, too. The trick now is to make sure you keep the right heads—those who are willing to pay the rents you push—in the right beds, while letting those who won’t walk.
“Our property managers using the system have become more confident that they can wait for the right prospect to walk through the door,” Lynn says. “You don’t have to lease your apartment to just anybody. Now, you can afford to wait for the right person at the right price.”
A key factor enabling that selectivity is the ability of most revenue management systems to offer different lease options to residents. Whereas the 12-month lease was the gold standard of rental terms in the past, systems will typically offer a lease with any term a prospect desires—at the right price. That means the entire concept of “market rent” has gone out the industry’s collective window; the rent for a three-month lease, for example, is likely to be much higher than that for 10 months. And, as is the case at Archstone, the importance of metrics such as loss-to-lease and gross potential rent—measurements of what a community could earn if it was fully occupied at the going “market rent”—is fading.
“The traditional ways people report their financials are going away because the definition of market rent is gone,” says Tamara Berndt, residential product manager for software firm Yardi Systems, which introduced a revenue management “toolset” into its property management platform last October. The tool integrates with both YieldStar and LRO for its clients.
“If you sign a 12-month lease, your rate may be $1,000 a month. If you sign a 10-month lease, it may be $950. But if you sign an eight-month lease, it may be $1,050. So who’s to say exactly what ‘market rent’ is in that scenario?” Berndt says. “It’s just a paradigm shift that’s making those types of definitions go away.”
This article first appeared in Multifamily Executive in February 2008.
No. of multifamily execs that plan to invest in revenue management technology in 2009
Source: 2009 MFE Strategies Survey
Don’t ask for higher rents without addressing these three factors.
1. Embrace new benchmarks. While occupancy is still important, it’s no longer the dominant barometer of a property’s health. Overall rent growth also weighs heavily into the equation.
2. Think of turnover as a good thing. Revenue management emphasizes recruiting and retaining only those who are willing to pay higher rents.
3. Be open to the alternatives. Flexibile lease terms will now be priced differently so the concept of determining “market rent” is disappearing, while a property’s overall revenue growth is becoming paramount.