Equity Outperforms with RevMgmt

            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.