The first annual Apartment Revenue Management Conference is a wrap and we are proud to say it was an overwhelming success. A special thanks to our sponsors and the industry leaders who shared their knowledge and insights into successful revenue management practices.

Over the course of the next few days, we will be utilizing this blog to post recaps from the various sessions presented at the conference. So be sure to check back often and we would love to hear your feedback on the sessions and what you take away from them.

Bob Cross Keynote Presentation

Bob Cross, author of the best-selling book Revenue Management: Hard Core Tactics for Market Domination and CEO of Revenue Analytics delivered the keynote presentation at the first annual Apartment Revenue Management Conference, and he did not disappoint. The audience was engaged, laughing, nodding their heads in agreement with his insights and feverishly taking notes as to not miss anything from the “guru of revenue management.” It was truly an honor to have him attend the conference as well as share his expertise in yield optimization. And let’s not forget Bob’s willingness to spend more than an hour signing copies of his book for conference attendees.

For those who were not able to attend the conference and missed out on hearing Bob speak – here are some of the key concepts he discussed:

• The guru of revenue management never took a business or marketing class. Revenue management started as a common sense discussion with key business personnel including executives and members from the operations, marketing and sales departments.
• Don’t view a revenue management system as the solution. It is a life-long learning process.
• The biggest competitors to successful revenue management are not the communities down the road but ignorance and inertia in the process.
• Don’t shut off your brain when engaging in revenue management, combine people and technology to generate the most success.
• Effective revenue management is resident-centric, however, a prospect should never know more about the market than your leasing staff. Make sure your onsite leasing staff is educated about pricing, the competition, supply and demand and the value of your product.
• One of the most common misconceptions about revenue management is the idea “you are the one sticking it to the customers.” Revenue management is really about ensuring “everyone wins.” The customer gets the product they want at a price they are willing to pay with built in perceived value while the company receives the targeted revenue goal.
• Even companies like Southwest Airlines, who many think doesn’t practice revenue management because they are not charging extra for checking bags or change fees, really do practice revenue management. The company has simply adjusted the model so it works best for them.
• Finally, Pop-tarts will sustain life during a hurricane along with some beer and ice too. Bob referenced a survey conducted before the major hurricane season 2005. The survey was conducted to determine what people would purchase to prepare for the storm. Though the results showed consumers said they would purchase the essentials, water, batteries, canned food, the actual purchases were completely different.  Strawberry pop-tarts were the most purchased item. This survey is a prime example that customers say one thing but often do or buy another. They don’t know what they want or what they will do. You can’t rely on a customer’s word to drive your revenue.  Utilize supply and demand as the foundation for your revenue management practices.

Over the course of the next few days, we will be utilizing this blog to post recaps from the various sessions presented at the conference. So be sure to check back often and we would love to hear your feedback on the sessions and what you take away from them.

Amenity Pricing Roundtable

Three of the industry’s leading pricing experts, Donald Davidoff, senior vice president strategic systems, Archstone; Dave Romano, vice president, pricing and revenue management, Equity Residential; and Kevin Huss, director of revenue, Resource Residential, sat down to discuss amenity pricing, the mechanics of determining price and how to get a handle on multiple amenities that can create value among prospects and residents. Here’s a run-down from the round-table discussion:

• Walk the property, understand its amenities – views, balconies, even square footage have different value to residents and prospects. Understand where the value is, establish a dollar amount for each amenity and blend this pricing with marketing to generate a perception of increased value
• Listen to your managers. They know what units always rent and which ones never rent. This information helps identify the amenities that generate greater value for residents, revenue for the community and can even pin-point undervalued and overpriced units
• Try to maintain consistent amenity values within a specific market but be aware it may not always work. Adjust pricing based on the unit’s exposure and amenity mix
• Amenity pricing as part of the effective rent strategy can range from 5-8% on the low side and 13-17% on the high side for a garden-style apartment. High rise communities can price amenities at 30-40% in the upper floors for views and highly sought after units with balconies
• Be careful. Bundling too many amenities together can quickly price your community out of the market

Monday also happens to be the kickoff of the 42^nd season of Monday Night Football—a doubleheader with New England at Miami (7:00) and Oakland at Denver (10:30).

So, football and revenue management. Interesting combination and it got me to thinking: We’ll have the top revenue management minds in the country gathered in Scottsdale at the conference. I wonder if they could show us how to employ yield optimization strategies in online betting to maximize our earnings? Hmmm, I wonder….

No, seriously, there is a great example of how revenue management works in the sports world, particularly in regard a certain product’s value in different market segments. That product? Super Bowl tickets.

Consider this: The average price for Super Bowl XXX tickets was $250 if purchased from the National Football League. However, the going rate for tickets in the secondary market was $1,450. That meant people who were able to purchase tickets directly enjoyed an average consumer surplus of $1,200. Talk about revenue.

What it boiled down to was perceived value; that is, certain customers valued the Super Bowl tickets more than others and happily paid more for them.

Revenue management techniques are extremely useful in dealing with opportunities presented by the variance to values that a product represents to different customer segments. In fact, the survival of your business may depend on your ability to identify such opportunities and capture that consumer surplus.

At the conference, you’ll learn more about RM tactics—market-based pricing, segment pricing and forecasting on the micromarket level—that will help you best deal with the differences in how market segments value your products.

I look forward to seeing you there.

P.S. Even though I don’t really know much about football – my picks: Pats over the Dolphins and Broncos over the Raiders.

TRANSPORTATION & PARKING

The Westin Kierland Resort is located 20 miles from downtown Phoenix and the Sky Harbor International Airport, and convenient to the Greater Scottsdale Airpark and its executive jet service. 

• Airport Transportation:

Airport transportation to The Resort is available through Transtyle Transportation with advanced reservations. Return transportation is available from the Front Drive 24 hours a day.

Curbside Pickup: $55 Sedan / $75 SUV

“Meet & Greet”: $75 Sedan / $95 SUV

Sedan will seat up to 3 guests; SUV will seat 6. Gratuity is not included, and prices are subject to change. To schedule airport pickup with at least 48 hours notice from your arrival, please submit the online request form or call (800) 410-5479.

Taxi service is available outside all terminals. Estimate for taxi to The Resort: $50–$60

• Car Rental:

Hertz Rental Car is available at The Resort, conveniently located in the Front Desk area of the main lobby.

Hours of Operation

Monday–Friday, 8 a.m. –5:30 p.m.

Saturday–Sunday, 8 a.m. –3:00 p.m.

480-624-1239

• Parking:

The Westin Kierland features a large parking lot directly in front of The Resort for complimentary self parking. Valet Overnight Parking is a charge of $27 per night.

REGISTRATION

The Registration Desk will be open:

• Monday, September 12, 3:00 p.m.–7:00 p.m.
• Tuesday, September 13, 8:00 a.m.–6:00 p.m.
• Wednesday, September 14, 7:30 a.m.–11:15 a.m.

CONFERENCE HIGHLIGHTS

• Welcome Networking Reception (Monday, September 12, 5:30 p.m.–7:00 p.m.)
• Opening General Session with Robert Cross (Tuesday, September 13, 9:15 a.m.–10:15 a.m.)
• Networking Reception (Tuesday, September 13, 5:00 p.m.–6:00 p.m.)
• Networking Breakfast (Wednesday, September 14, 7:45 a.m.–8:45 a.m.)
• Business Lounge (Tuesday, September 13, 8:00 a.m.–4:15 p.m. and Wednesday, September 14, 7:30 a.m.–11:15 a.m.)

SPONSORS

Many thanks to our sponsors, without whose support this conference would not be possible. 

• ApartmentGuide.com
• Assurant
• Benson
• CoreLogic/SafeRent
• Experian
• G5
• MarketSurveyTools.com
• On-Site.com
• Property Solutions
• Rainmaker
• Yardi
• YieldStar

 We look forward to seeing you at the conference!

More and more prospective residents are turning to such sites as ApartmentRatings.com, community Facebook pages and Twitter feeds to research a community as well as rant or rave about their experience. The article “Reputation Management is Revenue Management” on HotelNewsNow.com examines how closely revenue management and reputation management are connected.

The article discusses how Manchester Grand Hyatt in San Diego realized the importance of consistently monitoring your online reputation and leveraging that information to help drive revenue management practices. Manchester customers were using online forums to rate the hotel and express displeasure with pricing for amenities they felt should be included in the price. After consistently seeing these comments, Kristen Spitz, Electronic Sales and Marketing Manager for the hotel, took this feedback to a management meeting. By communicating how the hotel’s reputation was suffering online, Spitz and the revenue manager were able to develop a new package offering customers the amenities they assumed were free. 

Spitz goes on to say reputation management teams and revenue management teams working together is the way of the future. “There will be the revenue manager and the reputation manager,” she said. “Those two positions really go hand in hand. Take advantage of the people who are doing the marketing for you online.”

As a revenue manager are you working hand in hand with your marketing team and more importantly your social media manager?

To learn more about how to leverage revenue management practices from other industry, don’t miss the first annual Apartment Revenue Management Conference at the Westin Kierland Resort in Scottsdale, AZ. September 12-14, 2011.

The referenced article is the third installment of a 4-part series entitled “Building a Reputation” by Jason Q. Freed.

If you are coming in early or plan on extending your stay to do some sightseeing, you might be interested in some of the area attractions. There’s s little bit of something for everyone, whether you are an art enthusiast, thrill seeker or just like having fun.

• The Phoenix Zoo, featuring a Safari train, giraffe feeding, Monkey Village and more
• The Heard Museum, showcasing the history and art of native tribes of the Southwest
• The Desert Botanical Garden, hosting one of the world’s finest collections of desert plants
• CrackerJax Family & Fun Sport Park, offering go-carts, bumper boats, driving range and arcade games

By the way, rooms at the Westin Kierland Resort are now sold out. If you have not yet registered, you can call the resort (1-800-WESTIN-1) and ask to be placed on the waitlist. An overflow room block has been set up at the nearby Fairmont Scottsdale Princess, with room rates of $160 per night. (Call 800-344-4758 or 480-419-3155.) The cut-off date to secure a room is August 26, so be sure to make your reservation soon!

I hope to see you at the conference!

Apartment Revenue Management Conference

* Professional multifamily investors, asset managers and general partners;
* Pricing managers and analysts;
* Property management executives; and
* Quantitative marketing managers

* Learn revenue management strategies to maximize financial yield

* Attract new investors with superior operational and pricing capabilities the way the REITs do

* Brainstorm tactics with pricing professionals from other industries

* Skeptical? Fact-find with experts about whether rent optimization works in multifamily

* Find a competitive edge as a third-party manager with new pricing tactics and metrics

* Find vendors of systems, implementation consulting and data

* For brokers and lenders too – learn what revenue management means for underwriting transactions at maximum value

…and more!

Registration will open in the first quarter of 2011. A formal call for presentations will be issued at that time. However, we encourage the informal submission of ideas, topics and speakers right now and at any time. Please contact us with your thoughts.

Media inquiries: Don Canfield, LinnellTaylor Marketing, 303-682-3942 or don [at] linnelltaylor.com

Conference program: Steve Lefkovits, MultifamilyRevenue.com (510) 444-2988 or steve [at] jtimedia.com

NAA: Paul Bergeron, National Apartment Association, (703) 797-0606 or paul [at] naahq.org.

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.

To kick off our regular series of Revenue Manager Q & A interviews, we chatted with Hughes about the revenue management career path 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. Check back for Part 2 of our interview, coming soon.

MultifamilyRevenue.com: Thanks for joining us, Rich. You worked in the hospitality industry before coming to revenue management in multifamily. Is that a typical career path? How do you become a revenue manager in multifamily today?

Rich Hughes: Typically, there are two paths. One is sort of the hospitality background, which is the side I come from, and the other is for the very “quant” heavy folks. They tend to come from operational research and industrial engineering. I’ve done a bit of that as well in a former life.

When I went to grad school at Cornell, I was looking at all the different paths in finance. I enjoy revenue management because it is fairly new as a science. It’s also applicable in lots of places, but has not yet been deployed on a widespread basis. And finally, revenue management is about making money, which of course gets us all excited.

MFR.com: How did you get involved in LRO?

Hughes: I was very fortunate to get to work with Donald Davidoff, who for my money is the pioneer of revenue management in the multifamily space.

What became LRO was initially a Manugistics’ product, and Donald worked there, specializing in the heavy quant models for different industries. When Archstone engaged Manugistics, and eventually bought the product from them, Donald came with it. I was fresh out of school, and had some ideas about revenue management and apartments, but had never really gotten to play with live wires.

We spent a lot of time in the later stages of development working on the nuances of the application. I was very fortunate to work with Donald and his team, and I learned a lot. I’m very thankful.

MFR.com: What revenue management solution do you use today?

We employ a proprietary solution that’s been developed in-house, known as Rent Cheque.

MFR.com: There’s been a lot of focus on how revenue management has behaved in the current environment. What are you seeing at AMLI?

Hughes: In general, we’ve seen good results.

But one of the bigger hurdles is the cultural side. You need buy-in from your people. They have to believe that the technology works.

That can be a challenge, especially in times like these. When people have been beaten up by low occupancy and low rent expectations for a couple years, it’s important to remind them that we’ve seen rents higher than this four years ago, and that we can get back there.

When you haven’t had strong occupancy for a while, and your occupancy finally starts coming back, people can become  fearful that their occupancy will fall away again if they start pushing rents and revenue growth to the bottom line. But that’s what the model is recommending. Sometimes, it just takes faith to follow it. It’s about being as bold on the upside as you were on the downside.

MFR.com: Let’s talk about occupancy in the multifamily industry. It’s possible to have 90 percent occupancy with strong rents that are right on the edge of sustainability, as well as 100 percent occupancy with lower rents that leave money on the table. Given the adoption of revenue management in the multifamily industry, and our ability to move the rent needle in a targeted way, is occupancy still the right metric to look at to gauge a property’s performance?

Hughes: Occupancy is a legacy metric.

In days of yore, I think occupancy was a fairly good proxy for how well you were doing. If you’re 20 percent full, you don’t have your prices right. And I think we would all agree that if you’re 100 percent full, you’re leaving money on the table.

It’s really just a question of how much you’ve missed by. In the airline business, they like their planes to take off with one empty seat, because then they know there was one customer that wouldn’t quite pay that amount. It lets them know they were on the verge of being just the right amount of expensive.

From our standpoint, occupancy is still much more powerful than straight rent, though, for an important reason. When a unit goes from empty to full, you’ve got that instant — and often very large — revenue lift. You don’t get that with incremental tactical pricing changes, as the airlines do.

However, for the long-term sustainability of your business, you also cannot grow occupancy to 130 percent, so the future of your business and revenue growth has to come from your rates. It’s really about finding the balance between the two.

MFR.com: In the hospitality industry, occupancy has become less important, and yield per available room has taken on more prominence as a leading metric. Will occupancy become less important in multifamily, as we get more mature with revenue management?

Hughes: Although we are certainly revenue manageable, there are some nuances to our situation that are different from other industries. The big one for us is the slow inventory cycle. You sign a lease for 12 months. The advantage to that is we don’t have the price volatility that you see in the hotel business, where you can go from full to empty in three days.

The apartment business is much more incremental and marginal. I think occupancy will always be a high-level metric that C-level executives look at. If you’re at 70 percent, you’ve got problems. Even if you’re getting huge premiums at that occupancy, you’ll never convince me that the marginal dollars you’re making on one or two leases will make up for 30 percent vacancy. The math will never work that way.

I would say that at low occupancy regimes, you know what your problem is. The interesting thing is when you get to the submarket average, or what you might deem a strong occupancy position, whether that be 92 percent, 93 percent, or higher. Then it’s a question of what incremental dollars we can make on our available leases, versus the opportunity cost of people not leasing those units. And that, of course, is the very exciting question that revenue management attempts to address.

MFR.com: Even though we’ve seen concrete results in the multifamily industry from the use of revenue management technology, in terms of adoption, we’re still in the high single or low double digits.  Why do we still have relatively low revenue management penetration in our industry, even though we’ve seen results at this point?

Hughes: First of all, we are a traditional industry. We are probably not the quickest to embrace change. There are a few reasons for that.

We can embed a rent roll, and be fairly stable in terms of operations. We don’t have very high transaction density, as you might see in retail or banking. So the utility of this technology – and this kind of thinking, frankly – may be less relevant for us than it is for other industries.

With regard to adoption, let’s not forget that there is an expense to having revenue management. There’s a cultural expense, a salary/payroll expense, and an expense for actually using and deploying the technology.

For the big players, the REITs primarily, that’s an expense that you can bear over lots of units. But our industry is massively fragmented. By far the biggest leaser is mom-and-pop. They own more than 80 percent of the rentable space, but with just a few units each. For them, the cost-benefit analysis may not make sense. It might be a “nice to have it” right now, but given the current economic environment, I’m probably not going to spend the money for something that I may not fully understand, and certainly don’t fully believe in, in terms of the faith I have in the technology.

If only 8 or 9 percent are using it, I’m fine with that, because that 8 or 9 percent are going to do very, very well.

Look for Part 2 of our Revenue Manager Q & A with AMLI’s Rich Hughes next week.