On a recent business trip to New York, Andrew Rains, EVP at the Atlanta-based Rainmaker Group, was at a dinner with an institutional investor who runs a $4.5 billion real estate portfolio. The woman was especially interested in Rainmaker’s Lease Rent Options (LRO) revenue management (RM) software and how it works. “Then she told me her company was currently reviewing all its multifamily assets to make sure they were on revenue management,” Rains recalls. “It’s something we’re starting to hear all the time. Analysts and institutions are just constantly asking about RM now.” The fact that institutional investors are asking those questions represents a huge leap from where revenue management was on the radar screens of the multifamily industry—and its multibillion-dollar investment backers—just a few short years ago. Once viewed as an esoteric algorithmic solution for demand-based pricing that was the realm of math geeks and statisticians at a few of the big REITs, RM software is now being billed as a core component of a multifamily operator’s technology stack. With 11 of the 12 major apartment REITs now running some form of the software, the question of whether an operator has deployed RM in its portfolio is quickly becoming supplanted by the question of why not. Nowhere is that more apparent than in the world of institutional investing, where the men and women who manage billions of dollars for companies like GE Capital, RREEF, JP Morgan, and Northwestern Mutual are looking for outsized returns on their investments.
“When we talk to our institutional clients, the topic of revenue management gets woven into the tapestry of the conversation every day,” says Ed Wolff, chief administrative officer at Dallas-based third-party fee manager Pinnacle, an American Management Services Co., a firm that runs approximately 150,000 units nationally, including ones owned by Henderson Global Investors, Invesco, and Capri Capital Partners. One of the three largest property managers in the industry, Pinnacle has deployed Carrollton, Texas–based multifamily software maker RealPage’s YieldStar revenue management solution to help price those properties. While Pinnacle started that initiative in 2009, its institutional clients have been a big part of the momentum behind its push this past year. “If 2010 was the year of the cloud, 2011 was the year of revenue management, especially where institutional clients are concerned,” Wolff says.
Janine Steiner Jovanovic, president of YieldStar, takes Wolff’s assessment a step further. “[2011 was] the year that revenue management became the trend in the institutional investor space,” she says. She points to the decision by JP Morgan Asset Management earlier last year to deploy YieldStar across its entire portfolio and put its cadre of 14 fee managers on the system, an implementation JP Morgan pulled off in just over three months. The addition of the white shoe firm strengthened YieldStar’s growing institutional base. “It’s safe to say RM has officially arrived, and the interest from institutions only underscores that,” Jovanovic says.
Use It or Lose It
For fee managers, that interest has changed the tone of the conversation, especially when it comes to the routine meetings and check-ins that institutions use to keep tabs on their investments. Stephen Adams, a managing director in the San Diego office of Chicago-based LaSalle Investment Management, started adopting the YieldStar Price Optimizer tool in his 12,000-unit portfolio of conventional and student housing in 2008. He says that, today, it’s a given that his fee managers adopt the system as well. “It’s a practice we’re using, so they’re going to have an opportunity to get in, learn it, and use it to operate the property,” Adams says. “If someone told me they couldn’t, we’d need to consider an operator who could.”
It’s that kind of use-it-or-lose-it mentality that’s come to the forefront of institutional thinking today. For Wolff, as a third-party manager, speaking RM with clients is a must. “If you don’t have the expertise, experience, and knowledge to speak to revenue management now, your credibility [is compromised],” Wolff says.
The credibility crunch is being felt as institutions become increasingly aware of revenue management’s impact on the bottom line, largely due to many REITs’ success with the technology. With numerous operators attributing a lift of 3 percent to 5 percent in their portfolios to deploying the technology—names like UDR, Archstone, and Equity Residential come to mind—institutions are realizing that, absent an RM solution, money may be left on the table.
“Everybody wants to outperform the market,” Rains says. “So if the markets are projected to gain 5 percent in the next 12 months, the institutions are looking for a way to go up 8 to 10 percent.”
RM software can help do that by allowing owners to modify factors in the algebraic equation of asset valuations to allow for redevelopment and upgrades that increase an asset’s price and, consequently, the rent that can be charged. “If you want to maximize the value of your investment, you can upgrade the countertops or put on a new roof,” Rains says. “But what investors are realizing is that there’s no better way to do that than [through] revenue management.”
Push From Above
For owners and operators, the increased attention and implicit pressure from investors to detail how they’re using RM comes with a certain degree of irony. As revenue management was introduced into the apartment industry over the past decade, there was often a perception among on-the-ground leasing staff that the technology was being pushed—some would say forced—on them from above. The current awakening of institutions to deploying RM could be seen as a loose parallel, as those investors exert a subtle pressure on the owners they back or the fee managers who run their portfolios. Those institutions, of course, need to ensure they’re performing their own fiduciary duties to their shareholders. With articles focusing on the multifamily use of RM appearing in The Wall Street Journal and The New York Times in 2011, the argument that it’s an unknown technology without a track record in the industry no longer sticks to the apartment wall.
“You’ve seen the intensity turned up on all sides,” says Haendel St. Juste, an analyst at Keefe, Bruyette & Woods in New York. “Once institutions began understanding what this means, they started asking companies that have been slower to adopt [RM] some pretty tough questions.”
The upside of that understanding, at least for fee managers, is an opportunity to deploy revenue management on their clients’ behalf without incurring the cost to do so. In the past, fee managers have sometimes been hesitant to implement or even suggest RM, which was perceived as an added cost by investors who might not have yet grasped its value. Now, that’s all changed. “We have dozens of institutions as customers today,” Rains says. “In some cases, it’s direct with us, and in others, they’re having us sign contracts directly with their third-party managers.”
On the flip side, if you haven’t deployed an RM solution at this point, you might still be able to use that to your advantage. Like a value-add property that has deferred maintenance, what you don’t have may be viewed as favorable. “From an investment perspective, some buyers may look at the absence of revenue management as attractive,” St. Juste says. “It’s an unrealized return that they can easily bolt on to the portfolio.”
Collaborative Approach
Steve Lefkovits, president of Emeryville, Calif.–based Joshua Tree Internet Media, an apartment industry consulting firm that last year helped launch the inaugural Apartment Revenue Management Conference, says that while institutions may make their interest in RM known to owners and operators, they’re not typically inclined to tell the companies they invest in what to do.
“I think institutional investors are naturally reluctant to push too hard for specific operational changes,” Lefkovits says. “They’d rather pursue them as collaborative ventures.” At the same time, he has noticed a more nuanced approach by those institutions in the questions they’re asking today. “The ones that call me have very different questions today than they did five years ago,” he says. “Back then, they were more dismissive and had a wait-and-see attitude. Now, they’re asking about the comparative experience of other institutions. They’re starting to ask fairly detailed operational questions about how [RM] works.”
Contributing editor Joe Bousquin is based in Sacramento, Calif.
