Robert Cross, a revenue management expert who helped shepherd widespread adoption of the technology in the airline and hospitality industries, likes to tell multifamily audiences that the single best “upgrade” they can make at their properties—even better than granite countertops and stainless steel appliances in terms of ROI—is implementing an automated pricing system.
At face value, you might assume Cross is referring to the lift in rents that revenue management can generate, and he is. But for operators who have walked the dual paths of deploying a revenue management system and running a value-add renovation initiative, there’s a more subtle takeaway from that statement: Using revenue management can actually help you figure out which properties are good rehab candidates, and even whether you should make those granite and appliance upgrades or if Corian and faux façades will do.
“You can really take your amenity-based pricing to the Nth degree,” says Jim Cunningham, executive vice president for Naperville, Ill.–based Marquette Cos., which owns or manages approximately 9,000 units. The firm started using Carrollton, Texas–based RealPage’s YieldStar revenue management software last year to help make upgrade decisions. “In the old days, you might say an apartment that has a lake view gets an extra 10 bucks a month,” he says. “Now, in the high-rises and mid-rises, you’re looking at your entire stacking plan. If you’ve got a great fitness center, you can weight that however you want. And, of course, you’re getting updated pricing on that unit every day. Having that kind of data available and being able to analyze it to that extent is extremely helpful when you’re trying to achieve a particular payback on your upgrades.”
Ubiquitous Use
“You’re talking about revenue management, right?”
That’s the response of Mike Pestronk, partner at Philadelphia-based Post Brothers Apartments, a value-add developer of around 1,000 units, when asked which technologies make renovation projects easier. He was referring to the wide-scale use of the technology by many operators to look at their submarket comps, and then use those comps as a jumping-off point to make rehab decisions.
Marquette and Cunningham did exactly that at 100 West Chestnut, a 280-unit high-rise just north of the Loop in Chicago. Originally built in 1983, the property has won the National Apartment Association’s Paragon Award for excellence, but with its last overhaul completed in 2002, it was a prime candidate for fresher finishes in the past year. By projecting premium rent increases based on comps with similar amenities in YieldStar, Marquette invested $8,000 to $12,000 per unit to put in hardwood floors, granite counters, new appliances, upgraded cabinets, over-the-range microwaves, and light and hardware packages. The result? Rent bumps of $180 to $300 per unit throughout the building.
“YieldStar was really helpful in modeling the potential rent growth there,” Cunningham says. “Of course, it doesn’t hurt that downtown Chicago is about as hot as you can get right now, either.”
At Alpharetta, Ga.–based Rainmaker Group, which sells LRO revenue management software, executive vice president of sales and marketing Andrew Rains says the firm’s clients have been using revenue management to help take the guesswork out of the renovation process, both before and after upgrades are complete.
“Our customers have been using LRO for rehabs since the beginning,” Rains says. “Basically, they can use it to identify what type of rehab package they want to put in, and what type of premium they can expect to get for it. Then, by setting it up within LRO to look at it on an amenity basis afterward, we’re able to give operators a tracking mechanism to determine the success of their rehab projects.”
Englewood, Colo.–based Archstone, an owner of 50,894 units and a revenue management pioneer in the multifamily industry, is using Rainmaker’s program in the way Rains describes. By codifying its upgrades within its MRI property management system and then tracking those units in LRO, Archstone can see exactly how much rent it gets for which finishes. “We identify renovations and rehabs with amenity codes and then use those codes to track the performance of units with similar [amenities],” says Robert Lane, director of pricing and revenue management at the firm. “After a reasonable amount of time, we perform amenity audits to decide if the incremental charge associated with the rehab is on target.”
Likewise, at Highlands Ranch, Colo.–based UDR, a REIT that owns 48,003 units, executives use their own market knowledge and comps listed within YieldStar to strategically analyze how much of an investment is warranted at a particular property. “If the top of the market is only $300 above our community, we’ll do a smaller-scale redevelopment, primarily focused on kitchens and baths,” says Jerry Davis, senior vice president of property operations at UDR. “If it’s $500, we’ll do something more extensive to capture a bigger chunk of that rent gap.” UDR can also look at the numbers to decide whether to take a unit-by-unit approach, or if a lobby face-lift is all that’s needed. “We can look at what a kitchen and bath renovation will garner versus a common-area upgrade,” Davis says.
Future-Proof?
None of this is to say that revenue management can predict the future; it still can’t. But it can give you a much clearer picture of what’s possible. “The question you’re always asking is, how will the market respond? And the answer is, you still don’t know until you put it in place,” Rains says. “Typically, it’s going to be higher or lower than what your expectations were going into it.” In fact, some operators have used the program to help them test the waters by upgrading a few units initially, and tracking the premiums they achieve with them. In instances where those assumptions haven’t played out, they’ve stopped projects before throwing good money after bad.
And, as with applying the technology on the pricing front, revenue management can’t actually make your rehab decisions for you. The ones that make a difference are usually backed by years of hard-won real estate experience.
“At some level, it’s as much art as it is science,” says David Nischwitz, director of property redevelopment at Memphis, Tenn.–based MAA, a REIT that owns 49,133 units, across the Sun Belt. The firm has redeveloped more than 14,000 apartments, using a proprietary in-house renovations tracking tool that’s now tightly linked with both its LRO revenue management system and its core MRI property management software. But while that system helps him run extremely focused analysis, Nischwitz says that, in the end, operators still need to listen to their gut to decide what will work in a specific situation. “A cookie-cutter approach will get you in trouble,” he says.
Then there’s the fact that in order to track your comps, you’ve got to have comps to track. That means if you’re trying to fulfill a supply gap in a submarket where a particular product isn’t present—say, upgrading a Class B community to Class A in a market where no other As exist— revenue management might not be the best tool for the job.
At least, that’s the view of Post Brothers’ Pestronk. Since 2007, he and brother Matt have been creating multifamily Class A properties where there haven’t been any before, such as in Philly’s Germantown and Mount Airy neighborhoods, and now run seven properties with more than 1,000 units between them. While individuals and builders had previously targeted redevelopment in the single-family markets there, high-quality apartments weren’t yet part of the area’s housing stock when the Pestronks started targeting it. “In the areas we’ve developed, there really weren’t the kinds of Class A multifamily properties that we wanted to put in,” Mike says. “So in that case, I don’t think revenue management would have worked. In our case, we were really following the pioneers in the single-family market, and we just happened to be the first multifamily guys who got in.”
Pestronk concedes that as Post grows, it will likely need revenue management technology to scale to its own ambitions. That’s certainly the case with Plymouth, Minn.–based Dominium, a manager of 20,713 units across 20 states. While the company has developed its own proprietary databases and software to track acquisitions and renovations over the years, it’s now evaluating how it can integrate off-the-shelf revenue management software into its systems, as well.
“Our initial reaction is that we are very pleased with what it’s able to accomplish,” says Brendt Rusten, senior vice president of asset management at Dominium. “It’s kind of a no-brainer. From what we see, it seems like the bulk of operators will be using some form of revenue management for renovations going forward.”
Contributing editor Joe Bousquin is based in Sacramento, Calif.
