What Do Hertz, Disney and Princess Cruises Have In Common with Multifamily? More Than You Think.

By Joe Bousquin | August 19, 2010

Revenue Manager Q & A: Oakwood’s Jeff Young, Part 1

As one of the leading temporary and corporate housing firms in the market, Los Angeles-based Oakwood Worldwide maintains a portfolio of readily-available housing around the globe. Boasting a portfolio of 15,000 units in 4,000 locations across North America, Europe and Asia, its job is to provide short-term housing solutions – often on short-term notice – for its corporate, government and entertainment clients. Ever seen Jay Leno knock on the doors of celebs at Oakwood Toluca Hills? Yup, that’s one of their properties.

But since Oakwood doesn’t own all the units it rents out – it often leases third-party unfurnished units, furnishes them, then charges a premium on those lease terms – gauging its own supply and demand variability can be a complex task. That’s especially true since Oakwood’s supply of apartments tends to be elastic, with its demand affected by both seasonality and the general business climate. To help with that challenge, in 2009 the company brought in Jeff Young, a revenue management professional with 15 years experience ranging from auto rentals with Hertz, hospitality with Disneyland Paris and the cruise line industry with Princess Cruises. We chatted with him to get his take on the unique challenges of revenue management in this sector of the housing business.

MultifamilyRevenue.com: Thanks for taking the time to talk with us today, Jeff. Let’s start with your company, Oakwood Worldwide. What do you do?

Jeff Young, Oakwood Worldwide: Thanks for the opportunity.

Oakwood Worldwide has been in business for 50 years. While we started out as a more traditional multifamily owner, today, our main focus today is providing temporary and corporate housing solutions.

As part of that model at Oakwood, we have a number of properties which are fixed inventory buildings. These are the Oakwood buildings that are fully branded with the Oakwood name, fully staffed and fully serviced, in locations such as Southern California, Bellevue, Washington, Northern Virginia, Gaithersburg, Md. and, and Chicago.

A lot of people know about our Toluca Hills building in Los Angeles, right off the 101. That’s where Jay Leno goes around knocking on doors, asking people questions for his show.

So that’s the core of our portfolio.

Beginning in the 1990s, many of our corporate clients started asking us whether we could meet their needs in other markets, where we didn’t have dedicated Oakwood properties. We started engaging other owners and partners, to aggregate housing supply to meet that demand.

Today, along with many of our competitors, we negotiate leases for individual units and buildings throughout the country. We may take down half the apartments in a single building in New York City for six months or a year, and then remarket them as Oakwood apartments to our customers.

Of course, we also have individual and leisure travel customers that may be interested in an Oakwood apartment for a period that’s longer than a typical hotel stay, as well. But our core model is the B2B market.

MFR.com: What is the average term of your lease on the corporate side?

Young: We see an awful lot of business in the 30 to 90 day range. We also have good volume on the shorter-term side, from five days to one or two weeks.

Of course, we can also accommodate longer periods – for instance, we’re helping with the relief efforts in the Gulf right now. Many of those leases range from six months to a year.

MFR.com: You have extensive and broad experience with revenue management, having worked at the Disney Company, Hertz and Princess Cruises. How did you become a revenue manager in the multifamily space?

Young: Oakwood’sExecutive Committee is very progressive. , are very progressive. They were looking for someone to come in with significant experience to define and drive Oakwood’s pricing mission, developing the tools needed to succeed in the process.

I was contacted by a recruiter for Oakwood. My job here is to develop not only systems within the company to deploy a revenue management strategy, but to create a foundation for the processes and organization that need to be in place to do so.

MFR.com: What revenue management system are you using today?

Young: We are not on anything right now. That’s really why I’m here, to build this thing from the ground up.

We’re in the process of evaluating different options at the moment, and I hope that we’ll have made a decision in the next six months to a year. There are good solutions out there, such as LRO from the Rainmaker Group and YieldStar from RealPage.

But you’ve got to remember, ours is a more complex model than traditional multifamily. Because we have an elastic and perishable amount of supply, it’s imperative that we take into account the cost of the leases we enter into with other owners, as well as the number of leases we need to maintain in order to meet projected demand.

That’s a few more layers of complexity than what’s available in off-the-shelf solutions, so we’re still in an evaluation phase.

MFR.com: How does that added complexity affect the variables you look at, in terms of your revenue management model?

Young: The longer I work here at Oakwood, the more parallels I see with both the rental car business, in terms of managing the supply side, and the cruise line industry, in terms of the advance booking profile and buying behavior.

At Hertz, I worked on a four year project that looked at the variable revenue contribution of our fleet, and the interdependencies inherent in both supply- and demand-side decisions.

I'm a pricing guy at heart, and it's great to talk about demand forecasting, but what was interesting at Hertz was that we were able to optimize our fleet purchases, as well as our distribution decisions, in order to save a significant amount of money system-wide. Of course, if you have the right supply in the right place, you're going to be able to capitalize better on your demand opportunities. That was the whole point of what we were trying to do there.

What I didn’t anticipate, and what we learned at Hertz, was that about three times the return on investment ended up on the supply side of the equation.

So that's something I’m looking at here, which is managing our supply more effectively.

MFR.com: What similarities do you see with the cruise industry?

Young: At Oakwood, we have negotiated business with our corporate customers, but we also have a volume or block business that’s more akin to the group model in hotels, and especially, the cruise line industry.

And if you think about it, a multifamily leasing decision is not unlike a cruise purchase decision. They’re both big decisions, in terms of money. If you’re making a decision on where you’ll live for the next three to six months, that’s not dissimilar to a $20,000 decision to take your family on a cruise across the Pacific this summer.

At Oakwood, how we set up that block business, and then the type of inventory risk we take to satisfy that block demand, I think there is a close parallel there.

MFR.com: Where is your business coming from at Oakwood? Who is the "travel agent,” so to speak, that’s helping you fill your apartments?

Young: Today, we have an experienced sales force out there talking with our major accounts, such as the U.S. Department of State, or Microsoft, which is a recent win for us.

But for example, our top 100 accounts in New York City only comprise two-thirds of our total business there. So overall, you have a highly fragmented business. That fragmentation, of course, makes the supply side and pricing in general that much more complex.

At Oakwood we’re working to standardize our negotiated pricing process, and our block or group pricing model. Right now, it's still very much the Wild West out there.

We might only know about a given demand two weeks before we need to fulfill it, and if we don’t already have enough supply in that market, we have to take down additional units to meet those needs.

Keep in mind, our landlords, many of whom are using lease rent optimizers, or similar tools, are not foolish, either. They're not just out there giving us the space for free.

We may have to take it then, or in many cases, we may have already negotiated pricing with them, on the supply side, six months to a year ago. Now, in some cases that may be a good thing, but given the recent environment, you can also get stuck with a lease that’s more expensive than current market rates.

So it’s all very complex, and each factor impacts the overall model, which directly impacts our margins.

MFR.com: That’s a lot of moving parts.

Young: It is, which is why we're so committed to tightening up the pricing model. We’re very focused on hedging against those kinds of risks. In doing so, you win some, and you lose some, and hopefully you come out better on the other end.

Check back for Part 2 of our Interview with Oakwood’s Jeff Young soon.

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Equity Outperforms with RevMgmt

By Joe Bousquin | August 9, 2010

            Here's further evidence that multifamily companies using revenue management technology are pushing rents more aggressively than the market as a whole, and that those tools give them a better bead on what lies ahead than even the most comprehensive macro-economic analysis. 

            Following Colonial Properties Trust's impressive rent push during 2Q 2010, Equity Residential reported similar gains in its own pricing. On its earnings call July 28, the Chicago-based REIT said it has now grown base rents by 8.5 percent year to date.

            That gain compares to a 1.4 percent increase, on average, for U.S. apartment rents during the first six months of 2010, according to MPF Research, the analytical market research arm of Carrollton, Texas-based multifamily technology company RealPage, which also sells the YieldStar Price Optimizer revenue management solution.

            Equity Residential uses the Rainmaker Group's LRO revenue management software to help it determine rental prices for its apartments. Last month, Colonial, which also uses LRO, reported some of the most significant gains of any of its apartment REIT peers, including a campaign in Richmond, Va. that pushed rents by as much as 14 percent.

            Equity reported that compared to the same period a year ago – i.e., in the last 12 months — its strongest gains have come in Denver, where July renewals came in 6.7 percent higher than in 2009. For its portfolio as a whole over the past year, it has raised base rents by 5.8 percent. (Since rents fell more steeply in the second half of 2009, Equity's year-to-date increase for 2010 had to reclaim some of the negative ground it gave up late last year. That helps explain its 5.8 percent increase for the entire year, versus its higher, 8.5 percent gain for the year-to-date period.)

            Those gains have surprised market watchers, who had expected a slower and less pronounced rebound, particularly since overall job growth has still been relatively modest, according to official government jobs reports. On the other hand, multifamily economists often point to apartment demand as a better leading indicator of actual jobs creation than data from the Bureau of Labor Statistics, which are always backwards looking and constantly revised.  

            Yet, as positive as the collective rent pushes among Colonial, Equity and their peers have been for the first half of the year, David Neithercut, Equity's president and CEO, may have just cried uncle. He sounded a cautious note on the company's earnings call, and it seemed to be derived from what his 137,000-unit portfolio — one of the largest in the country — was telling him: that absent significant jobs creation in his submarkets, positive rent pricing momentum can't be maintained, no matter what process or technology is used.

            "Clearly, since January we've been aggressively pushing our rents," Neithercut said. "We're continuing to keep our foot on the accelerator. We just have to believe that without job growth and rising incomes, we will meet some point of resistance at some time."

            Of course, that view – that jobs create apartment demand – is nothing new. What was surprising on Equity's call, though, was how the company seemed to be drawing its conclusions: not from the macro-economic outlook reported by the government or economists, but from the very process it uses to price its apartments on a unit-by-unit basis.

            In response to a question from Banc of America-Merrill Lynch analyst Jeffrey Spector, who asked what assumptions Equity had built into its view going forward, Neithercut pointedly deconstructed the company's revenue management model.

            "We budget based upon every single property and what's happening with that property in its individual market," Neithercut said. "That includes any competition, what's going on with new supply, if any, what's going on with local employers, current occupancy, and current loss-to-lease. That's really the foundation upon which we project our expectations for that individual property. We add up 500 properties and that's how we come up with our number. This is not a top-down process here at Equity Residential."

            Neithercut's breakdown was insightful, if only for the fact that he emphasized his company's analysis is based on what it sees everyday on the doorstep of every one of it's properties. And while it may have seen reasons, from that analysis, to push rents in the first half and even into the third quarter of 2010, something it sees there now seems to be causing it to flinch.

            "Clearly… we need job growth to continue this trend," Neithercut said. "In terms of both job growth and rising incomes, the rate of [rent] growth we are currently experiencing is not sustainable."

            What do you think? How has your revenue pricing model behaved as a leading indicator of what's happening in your market? Are you still pushing rents in the absence of meaningful job creation? Email me, or post your thoughts to the LinkedIn Apartment Pricing Professionals page.

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What Double Dip? Colonial Pushes Richmond Rents 14 Percent.

By Joe Bousquin | July 23, 2010

Worried about raising your rents in the face of that “double-dip” recession that’s lurking around the corner? Don’t tell that to the executive team at Colonial Properties Trust.

In a 2Q 2010 conference call that provided plenty of nuggets for apartment pricing professionals to chew on, the company reported that it pushed collective rents by 5.6 percent on 28,000 units in May and June.

Even more stunning, though, was one of its submarket standouts: in Richmond, Va., Colonial was able to raise its rates by a whopping 14.7 percent.

Those results came during a quarter in which Colonial beat analysts’ earnings estimates by 2 cents, and felt enough positive business momentum to raise its overall outlook for the remainder of the year.

Chief Operating Officer Paul Earle told analysts Thursday that the company’s latest rent increases came while using the Rainmaker Group’s LRO revenue management software to push pricing. On its 1Q earnings call back in April, it announced it would use the system to test rent increases of 7 to 16 percent in various markets.

On its 2Q call Thursday, execs gushed about the initial results of that push, and the software they used to get there.

“LRO is doing a very good job helping us manage our rates,” Earle said. “We kind of turbocharged the LRO system, and then we let the LRO system start working the rents up or down. If we were too aggressive, it helped us adjust rents back down. And if we were not aggressive enough, it moved rents even higher.”

That was the case at the firm’s Richmond properties, where the company originally targeted a 10 percent increase in asking rents for its apartments, and the revenue management system pushed for even more. “LRO moved them up another 4.7 percent, so in Richmond, we’re up 14.7 percent,” Earle said.

Earle described that extra push as a primary example of why revenue management systems shouldn’t be viewed as an autopilot system for setting apartment prices, while noting that it took guts for the company’s leasing agents to follow its recommendations.

“It’s not a perfect black box. It requires a lot of interaction with on-the-ground intelligence,” Earle said. “And I will say that our men and women out in the field were fearless. They embraced this large rent increase beta test with enthusiasm. They were out marketing the price of their apartments far above the competition in anticipation that the competition would come up and join us, and that is what happened.”

Earle’s insights into the firm’s second-quarter pricing moves came in response to a question from FBR Capital Markets analyst David Toti. Citing guidance from Colonial CFO Reynolds Thompson that the firm’s prices for new leases should catch up to its rates for renewing leases sometime in the third quarter, Toti asked why the company was still maintaining a 96 percent plus occupancy, and not pushing prices even more.

Earle’s answer underscored the impact that revenue management solutions are having on the metrics multifamily pros – and indeed, Wall Street analysts – use to gauge the performance of an apartment portfolio. Namely, in a portfolio that’s managed for overall revenue, occupancy alone is not as important as the sweet-spot between optimal occupancy and optimal rent.

“We are really not occupancy driven,” Earle said. “LRO is set up under several business rules, but it really doesn't trigger specifically on occupancy. It looks at unit availability, traffic, our lease renewal schedule that’s coming and historical information from the same period of a year ago. So there are many business rules that will help us determine what is optimal rent, and there's a delicate balance between occupancy and rental rate."

In other words, when it comes to managing to revenue, occupancy alone is no longer king. At the same time, Thompson explained that company was using LRO to maintain current occupancies in anticipation of the seasonal drop that usually comes in the back-to-school third quarter.

Finally, when asked by Banc of America Securities-Merrill Lynch analyst Michelle Ko whether it was concerned about that double-dip recession we’ve all been hearing about, Colonial’s executive team, which actually boosted its Wall Street guidance on the call for the remainder of the year, said it hadn’t seen any evidence of a secondary slump materializing. When Ko asked whether it was pushing rents any less aggressively in July than in June, she got an uncharacteristically unambiguous answer for a Wall Street earnings call.

“No,” Thompson said. “We actually see the continuation of the positive pattern.”

See the transcript of the call here, and listen to it here.

Banc of America Securities-Merrill Lynch
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Revenue Manager Q & A: AMLI’s Rich Hughes, Part 2

By Steve Lefkovits | July 21, 2010

The following is Part 2 of our Q & A with AMLI’s Rich Hughes, where we talked about revenue management career paths within multifamily, the adoption of yield management in the current environment and how revenue management principles are slowly but surely changing key metrics for the apartment industry. You can read Part 1 here.

MultifamilyRevenue.com: Given its life-cycle so far, it seems revenue management was born into a recession in our industry early on, before gaining some momentum during the boom. But it seems like the current recession has stymied that enthusiasm again. Is that an accurate assessment?

Rich Hughes, AMLI: It is. For me, the interesting thing is that obviously, all revenue management tools are multivariate systems. Basically, you’re looking at a subset of the past, and trying to form an inductive model to predict what you should do in the future.

Given the fact that we came out of a very good time and went into a very bad time, I wonder how well some of the models responded. Did they still induce from a good time, and use a “good time” set of rules to try to predict what you should do in a bad time?

Anecdotally I’ve heard of people turning their revenue management systems off during the bad times. We certainly did not, but I think the confidence in revenue management’s ability to make money went down.

Of course, during the bad times, a revenue management system should manage the downside as well as it did the upside. That’s really what we are hoping for.

MFR.com: How did Rent Cheque respond?

Hughes: It made the right directional changes. I think with hindsight, we can ask whether the magnitude of the changes was large enough. Again, sometimes people think they can outperform the system. They may feel their product is worth more than it is. But it’s the market that tells you how much your product is worth, and we have to be very, very clear about that.

Getting caught in the vanity of the past is a loser’s game. Personally, I think all of our product is worth a lot more than you can rent it for right now. My advice would be, if anyone is looking to rent an apartment today, get in there quick while you can still get a deal.

MFR.com: The commercial and retail sectors measure results on a square-footage basis. From a revenue management perspective, would it be useful for us to measure ourselves on an NOI per square foot basis, for example?

Hughes: Again, it’s a bit of a different animal. Commercial and retail, when they’ve got blocks of space, have the ability to divide and subdivide that space, and find the cleverest fit for their tenants to make the most money from it. When a tenant moves out, they can elect to do that all over again if they want. So they’ve got flexibility in their product.

We don’t. We have one bedrooms, two bedrooms and three bedrooms, and I can’t make a three bedroom into a two bedroom and a one bedroom. That’s just not going to happen.

Also, we know empirically that small apartments have higher rent per square foot than larger apartments. The reason for this is that every apartment has certain capital intensive requirements; things like bathrooms and kitchens cost a lot of money. Bigger apartments can divide these costs across a lot of square feet, and smaller apartments divide them across fewer square feet.

The interesting thing is, if you run a regression analysis, you’ll find there’s actually a fixed component for any apartment, regardless of size. We did it with one of our high rises.

Let’s say that fixed component is $500 for every apartment. Once you subtract that out, the variable, per-square-foot rent is actually very linear, regardless of apartment size. But of course, the industry doesn’t look at it that way at all.

MFR.com: Does revenue management have the potential to change the focus of “keeping the heads in beds” in the apartment industry, to say, maximizing the yield per unit instead? Do you see that happening now or in the future?

Hughes: That’s a great question. I think that you’re basically asking whether NOI is a helpful number. The answer is, for development and underwriting, it is the helpful number.

The problem for us from a pricing standpoint, though, is that a lot of the expense side of NOI is built in by the time we get to the equation. Of course, to set price, the only expenses we really care about are the ones that influence the demand function, such as marketing.

For instance, one of the great questions of revenue management is, ‘Would you spend a dollar in marketing or customer acquisition to get two dollars in rent somewhere in the future?’

‘Absolutely,’ is probably the right answer.

The trouble is, marketing is not NOI. You can say the same thing about certain amenities. Can you get extra rent if you have a 24-hour doorman?

For costs that have a demand corollary, you may be able to get a better quality resident, or higher paying resident, or just more residents. But those costs are really just a very tiny subset of the overall expense structure, which includes the physical structure, maintenance and everything else.

So when you use NOI, you have this tiny bit on the expense side that’s good and meaningful in terms of revenue management, and then this whole massive part that you can’t affect at all. NOI, from a pricing standpoint, becomes very nebulous.

I would certainly make the argument that we should start looking at breaking out expense categories so that we can look at just those items that influence demand. That would be absolutely legitimate. NOI as a whole is just too cumbersome and holistic to be meaningful for revenue management.

MFR.com: Revenue management has obviously been a game changer for the industry. How has revenue management changed the way that you do business at AMLI?

Hughes: Our focus seems to have gotten more and more granular. Back in the old days, we looked at the portfolio or asset level, and said okay, AMLI at Happy Acres is doing okay.

Of course, that’s a very broad statement. Maybe the one bedrooms are doing great, and the three bedrooms are doing terrible, and it averaged out to be okay.

As we’ve gotten more and more granular, we’ve started optimizing unit types. Then, we’ve used amenities to optimize units, and now, we optimize leases and lease options.

So when you rent a unit, you look at the specific unit you want to rent. We have a basket of potential options that you can choose to customize your lease. We know that you can only pick one of those options, but we make sure every option we offer is profitable, or at the very least cost neutral, for us.

People talk about submarkets of one, and micromarketing and things like that. We are actually getting there. As we try to de-commoditize our product and move from renting blocks of space to the selling of apartment homes, which is what we all really want to do, it’s about tailoring a very, very specific offer to the customer. That may be a little bit more retailing than revenue management, but that is the pathway that we’ve been following.

MFR.com: What would you say to young professionals who want to pursue a career in revenue management in multifamily today? How should they prepare themselves?

Hughes: It’s funny. Not every company agrees on where revenue management lives and who should be in charge of it.

Some people think it’s an IT function, because it certainly is very technologically heavy.

Others would put it in more of a finance role, because it’s about making money.

Some people put it in operations, because it’s all about managing people and process.

And then there’s the fact that marketing is clearly a part of revenue management, too. It’s a part of the demand function, and that’s revenue management.

I think the right answer is, be prepared to embrace all of these disciplines. Be able to bring all of them to the table in a way that those departments can all feel vested in the outcome, and be stakeholders in the process.

It’s not one very specialized pathway, although it sounds that way from the job description. It sounds like a very specialized job, but you will touch a lot of other departments and a lot of other disciplines in order to fulfill your revenue management goals.

Revenue management works when the system works, when people have faith that it’s working, and when it has upper management support. So there are a lot of moving parts, and a lot of  cross-disciplinary aspects to good revenue management. I think you have to bring all of them together in order to be a success.

MFR.com: Thank you.

Hughes: It was my pleasure. Thank you for the opportunity to share my thoughts.

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