For those of you looking for some great background on RevMan technology and how it evolved before making its entrance into multifamily, check out this interesting and easy-to-read article co-authored by RevMan guru Robert G. Cross. Cross, of course, is author of Revenue Management: Hard Core Tactics for Market Domination, another must-read for RevMan mavens.

Published in the Journal of Revenue and Pricing Management, the article (co-authored by Jon A. Higbie and Zachary N. Cross) traces the emergence of RevMan in the airline industry in the early to mid-1970s, as it rose to prevalence not out of the genius of forward-thinking technologists, but the necessity of competitive survival.  As low-cost operators came onto the scene and deregulation started changing the rules of how airlines could price their seats, American Airlines turned to a new, novel approach for pricing then known as “yield management.” In a wrinkle worth noting, American paired its RevMan practices directly with its marketing initiatives right from the beginning, rolling out what would become its ubiquitous “Super Saver Fares” as an integral part of its strategy. It’s a point we’ve been making on this site for years — that RevMan and Marketing are the same thing – and one the apartment industry is starting to wake up to, especially among progressive RevMan players like UDR.  

The article opens by painting a dramatic picture of what was at stake for the airlines, and the intractable inertia they set in motion by unleashing this new form of business-meets-science to fill empty seats.

“It started as a desperate strategy for struggling airlines faced with the chaos of deregulation. They had only hoped to stem the losses. Instead, they inadvertently created a revolutionary way for all companies to boost revenue and profits by using data and analytics to predict customer behavior and optimize the price and availability of products,” the article opens.

The authors then detail the spread of revenue management into the hospitality industry, and how the de-centralized business models of hoteliers like Marriott called for both regional and global support and oversight, with the main driver for implementation coming from the corporate level. (Sound familiar?)

From there, you’ll learn about how the specifics of RevMan have been applied to rental car fleets, theatre tickets, parcel services and shipping, even financial services and wealth management. It details how Ford Motor Company generated an extra $3 billion in additional profits without making more cars. And it touches on developing customers for life, something UDR CEO Tom Toomey talked to us about last summer.   

(A close reading will also lead you to a citation of this article on RevMan in Multifamily Executive from 2008. Maybe that’s what it is to know you’ve arrived: when someone with Cross’s clout gives you a shout out in his own original work. Or maybe it just shows how new and relatively small RevMan still is in our close-knit industry.)     

The article closes by re-capping the quest of each industry’s RevMan pioneers, and what drove them.

“They knew that they were embarking on a new journey, and they expected to succeed,” the authors write. “They occasionally established new metrics. They invariably measured outcomes and eliminated obstacles to success. Their achievements have been inspirational for others and illustrative of the fact that advances in Pricing and Revenue Management have no boundaries.”

Sounds like they could have been talking about multifamily.

Tom Toomey, UDR’s president and chief executive officer, characterized that acceptance rate as “phenomenal,” especially in the relatively short, 9-month time span the company has had the system in place. The news comes as further affirmation of the spreading influence of technology not just on the marketing side of the apartment game, but in operations, as well.

What’s more, at properties where residents had a high propensity to renew online, UDR cut turnover by 2 percent, while boosting rents by 3 percent. The kicker at those outperforming communities? Ninety to 95 percent of residents who live there accepted UDR’s initial rental increase offer, no questions asked.

“Residents can make faster buying decisions and more are choosing to stay with our communities,” Toomey said.

The announcement came on the heals of a simmering debate in the industry, one that’s been trying to pinpoint the exact cost of “churn” in an apartment portfolio, to focus in on the sweet-spot, from a revenue management perspective, of pushing rents versus renewing existing residents.

Satisfacts Research estimates that the average cost for turning an apartment is $4,100, after taking into account average vacancy loss days, concessions, marketing, leasing staff time and repairs. At a company such as UDR, which owns more than 59,000 apartments, those costs can add up to real money, real quick.

UDR was able to push its online renewals by tying offers to its YieldStar Price Optimizer revenue management system, which it used to help generate keep-living-here offers to existing residents. By incenting residents to renew within a pre-determined window of time, or offering add-on amenities such as a color accent wall or custom closet, UDR has been able to introduce an element of the marketing-meets-customer-loyalty programs seen in the airline and hospitality industries.

The initiative helped lead Carrollton, Texas-based multifamily software giant RealPage, which owns YieldStar, to launch a new product line that it’s calling Online Renewals.

“UDR has been outstanding in working with us to develop Online Renewals. Their insight and innovation have created a game-changing product for the multifamily industry,” said Dirk Wakeham, president of RealPage. “Traditional online leasing has been a valuable tool for years. Now, for the first time, RealPage is extending the technology and strategy into the area of lease renewals, enabling property managers to retain the residents they currently have. This should create costs savings associated with marketing to new residents and allow leasing staff to devote more time to other site-level operations.”



Not all of these firms are at the same point in the adoption curve. Some are multi-year veterans who long-ago rolled RevMan out to their entire portfolio. Others may still be in pilots, with just one or two properties online. Then there are those who are still conducting “head-to-head” tests of various solutions at multiple communities.

Regular readers will notice that we’re not tracking the specific solution each company is using.

We’ve made this adjustment for a few reasons. First, what once was a fledging collection of RevMan pioneers in multifamily has now expanded enough for the term “universe” to rightly apply to it.

Yet, just like counting the stars, it’s nearly impossible to keep up with every company using this technology. The subsequent task of accurately tracking which solution each is using has now grown beyond this humble blog’s resources.

The overall goal of MFR.com has always been to track, cover and highlight the use of RevMan in multifamily, and we will continue to do exactly that.

But if you’re shopping for a solution and you want to know which one would be best for you, you’ll still be better served by doing it the old-fashioned way: get on the phone, press the flesh and get out to as many meetings as possible. Ask your colleagues, associates and peers about their experiences. There’s not a Yelp! for multifamily solutions – yet — but we’d wager you can find all the answers you need in your phone’s contact list.

Our goal in the future will be to determine how many units are actually being priced using all flavors of RevMan in the industry, and we’ll be talking with third-party providers who are better suited to gather and track that sort of data.

In the meantime, we will continue to track firms using RevMan, and maintain a broad, if not all-inclusive list. Which means if you fit here, but aren’t listed and would like to be, we’d love to hear from you.

Likewise, if you’re included, but would prefer not to be, email me.

And remember, make sure to get the latest on this and all of multifamily’s tech trends at AIM 2011, set for May 2-4 at the Hyatt Regency in Huntington Beach. And to get the focused download on all things RevMan, keep September 12-14 open for the inaugural Apartment Revenue Management Conference.

And now, the list:

• Abacus Capital Group
• AIMCO
• Alliance Residential
• Allison-Shelton Real Estate Services
• Altman Management Companies
• Amerimar Enterprises
• AMLI Residential
• Apogee Residential, LLC
• Archon Group
• Archstone
• Associated Estates Realty Corporation
• AvalonBay Communities
• B & M Management Company, LLC
• Babcock Brown Residential
• The Bascom Group, LLC
• The Bainbridge Companies
• Barrett & Stokely, Inc.
• Bell Partners
• Berkshire Property Advisors
• BH Management Services, Inc.
• BlackRock
• Blue Ridge Companies
• Bonaventure Realty Group, LLC
• The Bozzuto Group
• Capstone Real Estate Services, Inc.
• The Carlyle Group
• Carmel Partners
• Camden Property Trust
• Carter-Haston Real Estate Services
• Centennial Holding Company, LLC
• CIM Group, Inc.
• Cohen-Esrey Real Estate Services, LLC
• Colonial Properties Trust
• ConAm Management Company
• Continental Properties Company
• Corcoran Management Company
• Crawford Communities
• CWS Apartment Homes
• David Drye Company, LLC
• DEI Communities
• Dominion Management, LLC
• DRA Advisors, LLC
• Dunes Residential Services
• E&S Ring Management Corporation
• ECI Group
• Edgewood Management Corporation
• Epic Asset Management
• Essex Property Trust
• Equity Residential
• Ferebee Properties
• First Choice Management Group, Inc.
• First Communities
• First Montgomery Group
• Flournoy Properties
• Fogelman Management Group
• Forest City Residential Management, Inc.
• Forest Property Management
• FPI Management, Inc.
• Freeman Webb Company
• Gannon Management Group
• General Investment & Development
• GF Properties Group, LLC
• GMH Capital Partners
• Grand Peaks Property Management
• Greystar Real Estate Partners
• Griffis/Blessing, Inc.
• Grubb & Ellis Company
• Gumenick Management Co., LLC
• Hamilton Zanze & Company
• Henderson Global Investors
• HHHUNT
• Hirschfeld Properties, LLC
• Holland Residential
• Home Properties
• IMT Residential
• Interland Corporation
• The Irvine Company
• JBG Residential
• J.C. Hart Company
• JPI
• Julian LeCraw Company
• Jupiter Communities
• The Kamson Corporation
• KBS Companies
• Korman Residential
• Landmark Residential
• Laramar Group
• LaSalle Investment Management
• Legacy Partners
• Lewis Operating Corporation
• Lincoln Properties
• Madison Apartment Group
• Mark-Taylor Residential, Inc.
• MC Companies
• MEB Management Services
• Mid-America Apartment Communities
• Mission Residential
• Morgan Group
• Morgan Properties
• NOI Capital Partners
• Noland Real Estate Services
• Northland Investment Corporation
• Olympic Investors
• Orion Real Estate Services, Inc.
• Ovation Property Management
• Pacific Living Properties, Inc.
• PASSCO Companies, LLC
• PEM Real Estate Group
• Pinnacle — American Management Services
• The Prime Group, Inc.
• Prometheus Real Estate Group, Inc.
• Post Properties
• PRG Real Estate Management
• Regional Investment & Management (RIM)
• Renaissance Property Group, LLC
• Resource Residential
• Riverstone Residential Group
• RREEF
• Sack Properties
• Sagebrush Capital Management
• Sares-Regis
• Sentinel Real Estate Corporation
• Sequoia Equities, Inc.
• Shea Properties
• Sidal Realty Company
• Simpson Property Group
• The Sobrato Organization
• Sterling American Property, Inc.
• Steven D. Bell & Company
• Stockbridge Real Estate Funds
• Stonemark Management
• Sunrise Management
• Switzenbaum & Associates
• TIAA-CREF
• Trammel Crow Residential
• Transwestern
• UDR, Inc.
• Univesco
• Verde Apartment Communities
• Walton Communities
• Washington Real Estate Investment Trust
• Waterton Residential
• Weinstein Properties
• West Coast Redevelopment
• Westcorp Management Group
• Westdale Asset Management
• Western Rim Property Services
• Wilkinson Real Estate Advisors, Inc.
• Woodmont Real Estate Services
• The Worthing Companies
• ZRS Management, LLC

Tom Toomey, CEO of UDR, Inc.

In the gaming industry, revenue management pros have been linking their pricing strategies with internal marketing and customer retention initiatives for years. Look no further than Harrah’s exec Ruben Sigala’s detailing, at last spring’s AIM Conference, of the casino giant’s “Buffet-of-Buffets” initiative, where guests can choose to pay $40 more per night for their rooms to receive a veritable all-you-can-eat Vegas meal plan, good at any of Harrah’s buffets throughout the city. Sigala broke down how the program allows the firm to drive revenue for its rooms, while adding nominal, if any, production costs for that added rate.

Now revenue management may finally be starting to grow up in the multifamily sector, too:  While Highlands Ranch, Colo.-based REIT UDR has garnered attention for the electronic renewals system it began piloting this summer, the real rub of the platform is how it ties the firm’s own internal marketing efforts — from butter ‘em up wine-and-cheese socials for residents whose leases are set to expire to gotta-have-em incentives like HDTVs, Ipads and customized closets when they renew — back to its YieldStar Price Optimizer revenue management software.

By doing so, the company is able to instantly track demand on a go-forward basis, while using its existing inventory and resident base to set pricing for remaining, vacant units. And that could be just the beginning: the firm says the system has the potential to identify and analyze the rental habits of its most profitable customers – a process known as lifetime customer value analysis in predictive marketing circles — so that the firm can tailor its marketing efforts toward high-margin residents.

In an interview with Multifamily Revenue, UDR CEO Tom Toomey and Senior Vice President of Property Operations Jerry Davis detailed exactly how that system works, and what its potential might be in years to come.

MultifamilyRevenue.com: Tell me about UDR’s electronic renewal system. On your second quarter conference call, you reported a 92 percent participation rate by residents at the three properties where you piloted the initiative. What is the electronic renewal system and what are you doing with it?

Jerry Davis, SVP of Property Operations, UDR: We have basically taken our old system of renewals and transformed it into a self-service model that allows residents to renew electronically, in a convenient, easy-to-use manner. At the same time, it’s given us additional revenue opportunities to upsell features on our apartments.

Previously, we would send out a letter to residents 75 days prior to the end of their lease term, and extend an offer with one to three lease terms and prices.

In that model, residents would come into the office, and the manager might be trying to get a 4 percent increase. But the resident, obviously, wants their rent to stay flat, so they would try to get that manager to go lower.

With the softness in the market over the last two to three years, there would almost always be some negotiation. We would usually agree on some form of rent increase, but it typically was not the full amount we sent out in that letter.

The electronic version is done a little bit differently. We still send an email 75 days before your lease expires, but it directs you to go your resident portal account to the view your various electronic renewal options.

You have the ability right there, to click and choose from your various rental options with expirations between four and 14 months, whatever fits you best, and the price is already built in. It provides custom offers that are specific to you and your individual apartment home.

MFR.com: How have you been inducing customers to renew electronically?

Jerry Davis, Senior Vice President, Property Operations, UDR, Inc.

Jerry Davis: We’ve been offering small incentives to encourage residents to renew within the first 15 days it’s offered. We might clean your carpet, paint an accent wall in your apartment, or give you $50 off your rent for the first month. At some of our higher rent properties in San Francisco or Seattle, where rent can be $3,000 or $4,000 per month, we may offer you an iPad or something like that.

MFR.com: Giving residents free iPads sounds expensive. How can you afford to do that?

Jerry Davis: It’s really very cost effective. Turning a $3,000 to $4,000 apartment is going to cost you about $5,000 in terms of vacancy and turn costs every time someone moves out. So if I can give you a $400 iPad to lock you in quickly before you have an opportunity to look for another place to live, it’s really not a bad investment.

But typically, it’s not even that much. It’s usually just a carpet clean, or $50 to $100 one-time discount on their rent.

But by getting a better gauge early on as to how many people are going to renew with me, it gives me better vision 75 days out of what my exposure is going to be. That allows my pricing software to either push rents higher if I’m getting a good response to the renewal offers, or to cut rents if nobody is renewing.

MFR.com: Are you seeing opportunities to upsell renewing residents, so you can use that renewal as an opportunity to drive revenue, as well?

Jerry Davis: Yes. We might offer to remodel your kitchen and bathroom for an increase of $150 per month in rent, install an HDTV in your apartment for an additional $30 to $40 in rent, or build you a customized California Closet for another $30 in rent.

We also have a green living upgrade, where we come in and change all your lighting fixtures and install water-saving devices and a programmable thermostat for about $10 a month more – that one’s popular because it really saves residents money, about $40 a month total.

MFR.com: How are you marketing those packages to residents?

Jerry Davis: We might have a wine and cheese party in the model unit where everybody who is receiving a renewal offer in the next month would be invited. So maybe have 30 or 40 people come in, and you have your salespeople there, and you show them the TV or the closet, or whatever you’re offering.

So then, when they receive their notification, those items are still fresh in their mind. They can go to the portal and see the renewal offer, and make their choice right there.

MFR.com: This seems like an interesting evolution of revenue management technology within the multifamily industry. It sounds similar to how the hospitality industry might sell hotel rooms, or incentives the gaming industry might use to entice people to come to Las Vegas. What are the benefits that you see for multifamily in combining your revenue management and marketing efforts?

Tom Toomey, CEO, UDR: There are really four benefits to the program.

When you upgrade, you’re customizing your home.

Second, for the 20- to 35-year-old resident, this offers state-of-the-art convenience. I get to choose my lease term and what I want in my apartment home, and I don’t have to trouble with your business hours to do it. I can do it online at 2 a.m. if I want, and it takes less than five minutes to complete.

Third, is the early visibility Jerry gets to his pricing and demand. If he can know 14 days into a renewal notice whether you’re staying or not, he’s now got 75 more days left to figure out exactly how he wants to price the remaining availability. He’s more likely to optimize himself if he understands where his true demand is 14 days into it. Previously, most people were waiting until 75 days into that renewal to tell us what their intentions were.

And lastly, this changes the sales force dynamic from one of weakness, where somebody might physically come into the office and try to renegotiate, to a state of convenience, where people are less likely to negotiate the terms of their lease.

The entirety of that system changes the way we hire people, train people and ultimately, run our properties.

I think the bottom line can be seen in our margins. The portfolio is now running at 67 percent, which is where we were at the height of the market. We’ve been able to sustain those levels by utilizing the entire suite of technology to run our business better.

MFR.com: It sounds like you were really using your revenue management tools to optimize your yield. How do you create that perception of value and customer loyalty without angering residents at the same time and making them feel like they’re getting charged for every little thing, like the airlines have done with their baggage fees? How do you walk that line? Does it matter?

Jerry Davis: On some communities, we do bundle that together. So if you came in off the street,  and you wanted to get this apartment that already has a California Closet in it, I would not tell you how much that closet costs. It may be $1,100 apartment, but I’m going to tell you it rents for $1,130, and you get this great closet for free.

So it is a marketing tactic. But when I’m trying to sell it to you and you already live there, I pretty much have to break it out, because I can’t give you an extraordinary rent increase – I might be bumping you up 15 percent for all the extras you choose — without showing you the value you’re getting.

MFR.com: Has this blurred the line between the marketing department and the pricing department somewhat?

Jerry Davis: Yes, in fact, it’s gotten very blurry. We’re always looking at different value adds that we can offer to our customers to increase the value of the property.

MFR.com: In Las Vegas, Harrah’s drives yield on their hotel rooms by offering their “Buffet of Buffets” with the room charge. Is that the sort of concept that you’re driving at here, to  increase yield, while driving the value of the asset, and get a little here and a little there on the margin?

Jerry Davis: It’s a very similar strategy.

MFR.com:  As you focus on revenue, has occupancy become less of a driving metric than the overall yield?  Is occupancy today in multifamily as meaningful as it was in the past? Should we be looking more at yield per unit when analyzing operations?

Jerry Davis: I think with occupancy, you’re seeing much less fluctuation today than you did three or four years ago. As companies have adopted pricing software, most of us are able to maintain a fairly consistent occupancy. The aspect that we can move up and down, relative to demand, is price.

So looking at yield may be one way to look at it, but when you’re really trying to compare performance over the last year, we like to look at rent per occupied home. The other thing is we look at margin. We still think that margin is what drives the business, and we want more of our revenue dollars to fall to the bottom line. As you look at adding functionality to the electronic platform, some are going to cut expenses, and some are going to drive revenue, but the end result is we are trying to drive our margin up.

MFR.com: Your YieldStar system is optimized with your RealPage OneSite property management software. Are there any other systems that you can plug into this that could help you in terms of customer relationship marketing (CRM) or predictive marketing technology?

Tom Toomey: There are a couple of things that we think about in the future. One is that each individual community represents the cohesiveness of all the people who live there, and how they interact together. The second, as you highlighted, is a little bit of predictive behavior over time.

It’s not hard to imagine moving beyond looking at just a credit score, to looking at the overall revenue potential of your residents, and their likelihood to continue to renew with you.

If you look at our portfolio, I would bet that 35 percent of our residents will be there for five years. We have an average of 10 years at one of our properties, and around 20 months for the portfolio as a whole.

So the key will be what type of characteristics will ultimately lead  to someone deciding to rent with you for five plus years, versus the one who is just moving in while their house is being built, and the valuation you assign to them.

MFR.com: What might you look at beyond a credit score to identify those longer-term residents?

Tom Toomey: Our electronic platform will start enabling us to look at a number of characteristics, including credit scores, pay patterns, service requests, customer satisfaction, even their interaction on social sites. All of those things rolled together will give you a more cohesive picture of what their ultimate revenue potential might be.

It’s not always going to be pick this or that number. It’s about how do you develop an algorithm that encompasses all of those characteristics, and ultimately determines, from a revenue standpoint, what type of resident you will be.

If I were in the airline industry, and I knew that you flew 200,000 miles a year, I would immediately know that you’re worth much more to me than the person who flies once a year, but is still getting the same rate as you.

If you start thinking down those paths, you’ll start to identify your most profitable customers, and that’s ultimately who you want to rent to. But I think that’s still in the future. The bottom line is that this electronic platform gives us the ability to do things like that. As others are  still trying to figure out how to collect rent with ACH over the next couple of years, we will make progress on these other fronts.

MFR.com: Thank you very much.

The following is Part 2 of our Q & A with Oakwood Worldwide’s Jeff Young, where we talked about the unique challenges of the temporary corporate housing market, the impact of the supply side on pricing, the similarities of temporary housing with the rental car and cruise line markets, and the contrasts between the temporary and traditional multifamily markets. You can read Part 1 here.

MultifamilyRevenue.com: What’s one of the biggest differences you see between Oakwood’s market and more traditional multifamily?

Jeff Young, Oakwood Worldwide: When you look at corporate housing, one of the things that defines our industry is the opacity inherent in competitive  information.

There is really a lack of transparency out there in terms of what the pricing is. Some pricing is available online, but most of it is not.

At the same time, it’s not like hotels, where you can just shop the property around the corner and figure out exactly what’s going on. It’s a lot of anecdotal evidence. It’s a lot of discussions with accounts in the B2B model, and it’s a lot of picking up information wherever you can. It makes for a lot more detective work to understand which way the industry is trending.

So right now, we’re going out and getting better information. We signed up with Reis, and we looked at MPF Research and AXIOMetrics as well.

Combined with talking to our accounts, and getting input from our experienced professionals we have on the operations side, I think we’ll eventually be able to look at how we are really doing on an inventory cost per-square-foot basis.

MFR.com: So you’re managing your costs and your revenue, but not necessarily with an off-the-shelf solution.  Are you considering building a proprietary solution to target the corporate market? Or are you looking for an off-the-shelf tool that you can apply to the Oakwood model?

Young: I think we’re undecided at this point. Right, and I would say that we are still at step two or three out of 10. We have a long ways to go.

We are looking at off-the-shelf solutions, but the reality is the off-the-shelf solutions are not specifically tailored to the corporate and temporary housing model. There is a possibility that a vendor may be able to be modify a solution  to accommodate our model, but there will need to be some development there. I don’t want to say that’s an impediment for us to go with an off-the-shelf solution, but it is a question mark.

MFR.com: You have a very unique outlier, which is the supply side and what you can get for your leases on those non-Oakwood owned units. How would you develop a solution to overcome that hurdle?

Young: Well, from a statistical standpoint, you have a small numbers challenge in terms of the transactional volumes. This isn’t car rental, where the average rental might be a day and a half or two days. If you think about  the decision to sign a lease for an apartment for a month or two in terms of a blackjack hand, you’re putting a lot more  money on each hand.

It’s a very complex and important decision because there’s a lot a revenue it at stake. We need a top to bottom solution that is going to handle the process from bid and negotiation all the way to fulfillment in terms of putting somebody in a unit and at what price.

We need something that helps our sales force in determining what we need to quote for a given market, on a market-by-market basis. We need better granularity in terms of seasonal pricing and better granularity in terms of unit-type pricing.

MFR.com: What macro pricing trends have you noticed over the last eight months? Where are prices going in your business?

Young: There is still a reticence, and a real fear factor out there.  Now, there are some promising signs. We are seeing customers that are willing to consider price increases compared to last year, but keep in mind, last year many of our accounts were flat, or even negotiated reduced pricing in a very difficult environment. We were able to reduce our costs as well, but last year was certainly a very challenging period.

MFR.com: What kinds of drop-offs did you see in the darkest days?

Young: We saw 30 to 40 percent drops, in volume, depending on the market. On price, we were down 10 to 15 percent in many markets. That was the effective rate.

The good news is we saw the pricing really flatten out in the spring of 2010, and we’re starting to see some upward movement in the pricing in select markets this summer.

MFR.com: With the parallels you’ve pointed out between corporate housing and the rental car and travel industries, why do you think corporate housing, and multifamily in general has been slow to adopt revenue management technology? What’s the hurdle that has kept us from adopting it an in a broader way, such as hotels and airlines have done for instance?

Young: I think part of it is certainly scale. We’ve all seen what the Archstones of the world can do with this. But for an individual owner, I’m not sure the impetus is there. I know that’s where the RealPages of the world are headed, trying to go from the bottom up, going after the individual owners, and maybe they’re providing a base solution to some of those folks. But I don’t know if there’s anything off-the-shelf that’s really cost effective for that part of the market.

In the corporate temporary housing industry, I think it’s partly due to the complexity of the supply side of the equation. I think a lot of people think that if they go out and buy a pricing tool, and the inputs on the supply side are constantly changing, it won’t be able to react quickly enough. They’re afraid they’ll get whiplash.

MFR.com: How important is occupancy to you at Oakwood?

Young: That’s an interesting question. Culturally, one of the metrics you hear at Oakwood is ‘vacancy’ instead of occupancy. Well, that’s kind of a negative view, when you think about it. We should be thinking about driving our occupancy up, and not how to reduce our vacancies. Obviously driving occupancy is critical, but at what price?

One of my goals is to manage to revenue potential, because overall revenue potential at 93 or 94 occupancy could be significantly higher — or even just marginally higher – than when we’re at 97 or 98 percent.

Historically, you would go out and take down more units to gain supply, but then get hammered when you had too much vacancy. Determining the sweet spot of an inventory level that allows Oakwood to capitalize on revenue opportunities without unnecessarily diluting the existing revenue stream, that is the challenge.

MFR.com: Thank you.

            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.

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.

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.

The two multifamily revenue management mavens outlined how their respective solutions – the Rainmaker Group’s LRO and RealPage’s YieldStar Price Optimizer — behaved during the downturn, and what they saw in the first part of 2010 as markets began to recover.

Steiner Jovanovic said her clients were able to respond to falling demand with more moderate pricing adjustments and that YieldStar properties were able to sustain occupancy levels without the rent loss experienced by the general market. In general, she pegged her clients’ outperformance of the market at 3.2 percent nationally in terms of rent and occupancy.

While she didn’t detail the difference between YieldStar users and the market on the way down, she did give comparative numbers for the rising tide of 2010.

“If you compare our results in the first quarter of 2010 to the first quarter of 2009, [YieldStar] properties outperformed 3.7% in revenue, which was made up entirely of net effective rent,” Steiner Jovanovic said. “The markets are still catching up on occupancy, but because YieldStar properties were already in a more favorable occupancy position through the recession, they’re able to push price much more aggressively now.”

For Archstone’s Davidoff, perhaps the earliest adopter of revenue management technology in the multifamily industry, having his LRO pricing tool was the saving grace of an otherwise brutal two-year period.

“It’s fascinating to me,” Davidoff said. “I honestly don’t know how anyone could have made it through this past cycle without a revenue management tool.”

He said that LRO started reacting to the reduction in demand as far back as December 2007, even though seasonality was still giving many operators a false sense of strength, just as they approached the abyss in 2008. Then, the system started projecting strong demand at a time when much of the market was still in the doldrums – and scared into paralysis – when it came to pushing rents back up.

“We’ve had spectacular rent growth in the first quarter of this year, and our year-over-year numbers are up substantially,” Davidoff said. “It all started in the fourth quarter [of 2009], before operators could feel it, before there was that visceral understanding of what was going on in the market. But the statistics were bearing it out. The guest card counts were rising, the leasing velocities were more steady and solid, and supply wasn’t quite as brutal, and all of that played together.”

Speaking of raising rents, the two apartment execs also had an interesting perspective on the potential for “green” amenities to push rents in the coming cycle. Spurred by MFE’s moderator Chris Wood, who asked whether revenue management systems could generate “green” premiums in various markets, the two pricing pros were surprisingly optimistic.

“There are already premiums within specific portfolios being garnered by green buildings, I would say particularly within the Pacific Northwest,” Steiner Jovanovic said.  “With regards to YieldStar the results will be there…  any component that drives demand will be capitalized on by the system in the form of affecting rent growth.”

Davidoff, who said Archstone hasn’t explicitly discussed using LRO to get a “green” lift in rents at the company’s properties, pointed to the science of revenue management to say that if green buildings are valued more highly by prospects, they will, indeed, be priced accordingly.

“Where residents or prospects favor green buildings, and if we do our marketing job correctly in communicating those benefits, we will see demand rise, we will see our own internal supply drop and LRO will respond by raising rents,” Davidoff said. “The value of green, or any amenity or feature of a property, is ultimately going to be realized in the demand response.”

You can access the full exchange here.

Joe Bousquin

Editor’s Note: With this column, I begin my tenure as executive editor at MultifamilyRevenue.com. Given my background covering technology in the apartment industry, I couldn’t be more thrilled to take on this new role. Feel free to check out my bio here.

My goal is to expand MultifamilyRevenue.com’s role as the go-to source for information on the use of revenue management in the apartment industry. Please email me with your questions, thoughts or news: joe@multifamilyrevenue.com.

***

Since the start of the downturn there’s been a lot of focus on how revenue management works in a recession. Proponents argue that revenue management software can keep an apartment portfolio above water, or at least flat, in a down market. Skeptics conjure visions of “black boxes” leading leasing agents off a cliff, into an abyss of perpetually declining rents.

In case studies, interviews, and at recent conferences, a consistent trend has emerged: revenue management has helped mute the pain of the economic downturn, and may already be serving as a springboard toward recovery.

Colonial Properties Trust’s most recent earnings call provided evidence of how revenue management is  impacting the REIT as the rental environment begins to thaw. During a question and answer session on the REIT’s 1Q 2010 call, UBS analyst Dustin Pizzo asked Colonial’s executive brain trust about the feasibility of pushing rents, given the firm’s 96 percent-plus occupancy.

The company’s response? It was going to start testing increases of 7 to 16 percent at select properties, particularly those that had high occupancy rates, and felt comfortable doing so because of the revenue management technology it has implemented.

“We’re not interested in maintaining 96 plus percent occupancy without aggressive rent increases coming in behind that,” Colonial CFO C. Reynolds Thompson said on the call. “We have the pricing system in place, [the Rainmaker Group’s] LRO, and so we have a very good tool that allows us to move very quickly with our rental rates.”

Tom Lowder, Colonial’s CEO, said he anticipated getting a good lift in coming months, based on the firm’s use of revenue management in the past. “Our experience in the last cycle, when we had this kind of demand at our back, was very good,” Lowder said. “We expect to see the same kind of results this time, as we get in that same type of environment.”

Colonial’s example of the impact of revenue management comes on the heels of similar validation at the Apartment Internet Marketing Conference which was held April 28-30 in Huntington Beach, Calif. There, attendees discussed revenue management’s performance during the recession, as well as the technology’s inherent link to marketing initiatives. In a session titled “Marketing for Third-Party Managers,” fee managers discussed the disparity they saw in their portfolios between properties using revenue management, and those that weren’t.

Jennifer Staciokas, vice president of marketing and training at Lincoln Property Company, said in her 130,000 unit portfolio, properties using revenue management outperformed manually priced communities by 4 percent. “Even at properties where you’re seeing a decline, if you look at the market, the market is typically losing more than we are,” Staciokas said. “We continue to see a lift.”

Gail Duke, senior vice president at Sares Regis Multifamily Management, initially a skeptic of what she saw as a “black box” solution, reported a 2 to 3 percent outperformance at revenue managed properties. “I am converted,” Duke told AIM attendees. “I am a born-again revenue manager.” See video of the session here: http://www.apartmentinternetmarketing.com/2010-conference/marketing-third-party/

In a recent white paper, Joshua Tree Consulting President — and MultifamilyRevenue.com Publisher and Editor — Steve Lefkovits took that notion one step further. He wrote about how Englewood, Colo.-based apartment owner Archstone was actually able to get a 1.5 percent revenue lift by pairing its LRO system with the Level One Call Center application. The two-pronged approached allowed Archstone to push rents during the heart of the recession, from January to September of 2009.

“The test results contradict traditional industry thinking, which has held that new or excess demand in fully occupied properties is wasted because the property has no ability to raise rents in a competitive market,” Lefkovits wrote. “These results show conclusively that with sufficiently granular insight from LRO, Archstone was able to turn incremental demand into higher rents and revenue per unit.” Check out the full white paper here: http://www.multifamilyrevenue.com/2010/03/new-white-paper-archstone-test-shows-1-5-revenue-increase/

The role of revenue management in the recession, and Archstone’s use of Level One with LRO, will be explored in depth later this month as part of industry trade journal Multifamily Executive’s Virtual Conference: Tech Trends 2010 and Beyond. The all-Internet confab, originally scheduled for June 21, will now  kick off June 28.

Chris Wood, MFE’s senior editor, will moderate a panel titled “Adopting and Optimizing Revenue Management Systems in the Recession.” Wood touts the session as a kind of Celebrity Deathmatch between apartment revenue management heavy weights, with one of LRO’s most prominent users pairing off against the top brass at RealPage’s YieldStar division.

“It’s going to be a no-holds-barred face off between two of the go-to industry experts on revenue management: Donald Davidoff, Group Vice President of Strategic Systems at Archstone, and Janine Steiner Jovanovic, President of YieldStar over at RealPage,” Wood writes in an email. “We’ll be talking about how Archstone has juiced up LRO with Level One Call Center, as well as overall industry adoption. We’ll also get pretty in-depth on how pricing and demand algorithms responded (or did not) to the recession. Donald and Janine are going to touch on their own adoption and migration tips, and we’ll wind it up by talking about the merging of technology and marketing and the ability for revenue management to serve as a broader corporate strategy tool and not just a pricing box.”

Find more info about the session here: http://mfevirtualconf.com/

What do you think? What experiences have you had with revenue management during the recession, and what do you see now that the climate is starting to turn? Email me at joe@multifamilyrevenue.com, or post your thoughts to the Apartment Pricing Professionals Group on LinkedIn.