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.

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.

Attendees of “RealWorld 2010,” the new moniker for multifamily software maker RealPage’s annual user conference, will learn how Price Optimizer works in at least three different sessions.

Topics range from “Revenue Management 101” to “Eliminating Concessions” and focusing on best practices to get the most out of revenue management technology.

YieldStar Price Optimizer, which helps set prices for approximately 700,000 units nationally according to this post from Keith Dunkin, vice president of business development and client services at YieldStar, is one of two major revenue management solutions used in the multifamily industry today, along with the Rainmaker Group’s LRO software package.

You can check out the complete run down of RealWorld 2010 revenue management sessions, to be held in Las Vegas July 25-27, here. (While a session on the business side of the senior living market was originally cast in the revenue management track, and highlighted in this column, RealPage has re-categorized it as a general session on its Web site.)

Speakers include a veritable who’s who of apartment pricing pros, including UDR’s Chris Long, Greystar Realty Partner’s Tom Bumpass, Archon Residential’s Mark Van Tilburg, Camden Property Trust’s James Flick, Berkshire Property’s Ken Catmull and Trammell Crow’s Susan Vickery.

With that kind of star power, RealPage says attendees will see how revenue management can help properties reach their potential, while achieving premiums of two to five percent over market performance.

That range is just slightly higher than the two to four percent spread typically cited for revenue management in the apartment industry. But it’s also not surprising that RealPage is one-upping the revenue management ceiling this year, given the momentum many owners and managers are starting to see as the recovery takes shape.

Colonial Properties Trust, for instance, an LRO user, recently said it intended to push rents 7 to 16 percent at selected properties using its revenue management tools.

After this MultifamilyRevenue article highlighted that trend, Keith Dunkin, RealPage’s director of business development and client services, commented that YieldStar users were also experiencing a lift in the current environment.

“Now that markets have begun to turn, we have seen aggressive rent increase recommendations becoming more prominent and are confident that the Revenue Management systems will help to lead the market back up,” Dunkin wrote on the LinkedIn Apartment Pricing Professionals group. “In the latest ‘down market’ YieldStar partners benchmarked their performance to non-YieldStar assets and 3rd party data providers and are seeing an average effective revenue premium of 3 percent plus, with some experiencing several points above.”

You can see Keith Dunkin’s full comments on the LinkedIn group, here.

Are you a YieldStar or LRO user? What results are you seeing in this environment? Let us know on the LinkedIn Apartment Pricing Professionals page.

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.

“We believe it is most efficient to find local management with local expertise, and we don’t expect a single fee manager to understand every market either,” says Kyle Ellis, one of the managing partners of Abacus. “We’re perfectly comfortable working with several ‘best-in-class’ management firms across our portfolio.”

The first major issue is when multiple fee managers are used they all use different data and their own internal metrics and strategies.

The second problem with using multiple fee managers is inconsistent reporting. “When there are different types of reports coming in, on different schedules, it can be quite difficult to keep up with what’s really going on out there,” Ellis says.   “What you want is a single, consistent, and methodical approach to pricing and an accurate and timely reporting solution that’s used by all managers.”

Abacus adopted a standardized pricing strategy by deploying RealPage’s Yieldstar revenue managemnent system to help eliminate many of the inconsistencies they were experiencing.

Revenue management systems for multifamily generate pricing based on several factors, including current and expected vacancies, projected demand, recent rental rates, amenities, lease term, move-in date and existing market dynamics. Optimized pricing can be achieved daily, which in turn will help operators generate more income and improved financial results.

Read more about the Abacus case and other Yieldstar case studies on optimized pricing here:

Multiple Fee Managers, One Revenue Management Solution

Dr. Jian Wang

In a recently published white paper, “The Implementation of an Apartment Dynamic Pricing System,” Dr. Jian Wang, vice president of research and development for The Rainmaker Group, describes in great detail the implementation of an apartment dynamic pricing system with particular emphasis on setting optimal rental rates for new leases. The system he describes “has been helping several leading apartment operators offer prospective tenants a menu of rent options for the last six years. It sets the optimal rents everyday, which are presented in the form of unit type, move-in week and lease term.

Click here for entire white paper

Apartment operators struggle with a myriad of issues, one of the most important is setting rental rates for new and renewal leases. Traditionally, rents are typically set with the goal of achieving market share, maintaining occupancy and remaining profitable. Rents are determined by various factors including market condition, competition, condition of property, and vacancy rates. Management experience also plays a role in determining rental rates.

Revenue Management (RM) has emerged as another way to determine lease rates for apartment operators. This methodology uses data-driven pricing to find the optimal price for individual apartments based on current and forecasted market conditions.  Apartment Revenue Management Systems (RMS) is a rapidly growing trend for setting rental rates in the apartment industry. Once limited to the airline and hotel industries, RMS has seen significant growth in the apartment industry since multifamily-specific software hit the market several years ago.

The article includes a study of the characteristics of apartment rental firms compared to hotels from a revenue management perspective. The characteristics that apartments and hotels share:

• Both are perishable products (they are worthless until they are occupied again)
• Both have constrained supply (there’s only so much to go around)
• Both are effected by advance consumption decisions (customers reserve product before using)
• Both have censored demand observations due to product availability and/or pricing constraints

However, the apartment industry does distinguish itself with the following characteristics:

• Longer lengths of stay
• Fewer transactions
• No repeat customers
• More renewals
• Riskier decisions
• No group booking
• No walk-ins
• Concessions

Dr. Wang outlines his expert view on the design of an optimal multifamily revenue management system with modules including:

• Data Aggregator – links the property management systems and the RMS
• Statistics Operator – estimates a number of business statistics based on the aggregated historical data
• Demand Forecaster – predicts the remaining unconstrained demand for a finite planning horizon, which will be fed into the Rent Optimizer module
• Supply Forecaster – predicts the number of units available for lease for a finite horizon of future weeks
• Reference Rent Calculator – estimates reference rates
• Rent Optimizer – calculates optimized rents from which the optimal rental rates are derived in the Rent Recommender module
• Rent Recommender – module that recommends optimal rents by disaggregating optimized rents

Dr. Wang has more than 16 years of experience in mathematical modeling, system architecture, and implementation in engineering and software vendor industries. He’s a demonstrated leader in operations research and is published in several top journals.

Click here for entire white paper

Below are selected videos taken from a presentation given by Kathleen Reidenbach of Kimpton Hotels. In the short videos, she shares revenue management practices and strategies used by the lodging industry and draws parallels to the multifamily industry.

Revenue and Market Share Lift from Using Revenue Management

Kathleen Reidenbach, Vice President of Revenue Management and Distribution for Kimpton Hotels was kind enough to speak at length to the 2008 AIM Conference.  Her presentation detailed Kimpton’s increased revenue and market share from revenue management, how they optimize pricing using demand information, and the deep integration of marketing with revenue management and the staffing required to reach the right customers with the right offers at the right time.

For those interested in managing advertising in social media, the last video will be especially useful as she details how they use public feedback from ratings sites as a management tool, and how Kimpton manages their brand reputation in an environment with customer-generated content.

Reidenbach’s complete presentation is available on this site to view.  Above and below are four video excerpts of some of the most directly applicable lessons she shared with the multifamily industry.

Revenue Management Staffing and Infrastructure

Automatic Distribution of Pricing
Across Marketing Channels

Reputation Management – Customer Ratings and Comments

Steve Small, Executive Vice President, AMLI Residential

Does revenue management work?  Steve Small of AMLI says yes.  At the 2008 AIM Conference, AMLI Executive Vice President Steve Small presented a case study of the impact of revenue management on  AMLI’s NOI growth performance relative to its REIT peers.  (Data was taken prior to the company’s purchase by Morgan Stanley.)

• According to a Wachovia Securities study performed annually, in 2000 AMLI ranked ninth among its peers in revenue growth.  After implementing revenue management and other optimization techniques it ranked first in the REIT peer group from 2003 until the company went private in 2006.

• At the same conference, Small presented a 2006-2007 analysis of AMLI’s NOI growth by market relative to the NCREIF index.   AMLI outperformed the NCREIF index in every one of its markets by 30 to 105 basis points of NOI growth during the period of the second quarter of 2006 through the first quarter of 2007.  AMLI’s markets were:  Atlanta, Austin, Chicago, Dallas, Denver, Florida, Houston, Kansas, New Jersey, Seattle and Southern California.

The complete slide presentation may be found online on the AIM Conference site.