Mike Lacy, Director of Pricing and Revenue, UDR

As one of the largest and most tech-savvy operators in the multifamily business, it’s no surprise that Highlands Ranch, Colo.-based UDR is a big proponent of revenue management. The REIT turned heads in apartment world last year when it announced impressive results from its online lease renewal platform, which offered existing residents time-sensitive incentives to sign on the dotted line again. The initial results were jaw-dropping: a 92 percent participation rate at its pilot properties, and continued robust results as it rolled the program out to the rest of its portfolio.

In November, UDR promoted Mike Lacy, formerly in acquisitions at the company, to the position of director of pricing and revenue, taking over for Chris Long, who left the company last year. We caught up with Lacy to learn more about how he landed a job that prices 58,796 units, and gauge how the REIT’s system is performing in this era of the “sticky” resident.

MultifamilyRevenue.com: Tell us about your background. How did you become a revenue management professional in at UDR, and where does your company operate?

Mike Lacy, Director of Pricing and Revenue, UDR: I have been working in the real estate industry for five years and four of those years have been spent working for UDR in various roles.  I spent the past year in acquisitions and prior to that I spent three years working in operations within our business intelligence department.  I hold a Masters degree in Real Estate & Construction Management and this, together with my experience on the operations side of the business, has prepared me well for my current role.

Our portfolio is concentrated in markets with a relatively steady job supply that also have high barriers to entry for homebuyers and developers, leading to a higher propensity to rent. As of November 8, 2010, UDR owned or had an ownership position in 58,796 apartment homes including 712 homes under development concentrated in Metro DC, Southern California, San Francisco, Florida, Seattle and Boston.

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

Mike Lacy: YieldStar.

MFR.com: What’s the average renewal increase that your revenue management tools are recommending across your portfolio now, and are you following them or going beyond them?

Mike Lacy: Renewal increases are controlled through our corporate strategy and we push our parameters in markets where we feel we have the most pricing power (i.e. lack of supply or access demand).  We are experiencing very healthy renewal increases across our portfolio.  Leases signed a year ago were at their lowest rate signed in years, so renewals are pricing on average at a near 6% growth.  We spend a great deal of time looking at renewals to determine the greatest potential increase.

MFR.com: At what point (or percentage increase) do you get push back from renewing residents?

Mike Lacy: Today’s resident is very educated about the market and they know what their respective home is pricing at, so it often depends on how far off the current resident signed their lease at from where the market is today.

MFR.com: How is turnover tracking, compared to past periods? Are residents “stickier” today, and more apt to renew at a higher rate?

Mike Lacy: Resident retention has been trending better for the past year; although it feels as though people are still uncertain with their job security.  Better turnover can also be attributed to our focus on customer service and the simple fact that deals on apartment homes are not as prevalent as they once were during the economic downturn.

One challenge we faced in past periods was higher supply of new competition entering the market place; residents would often jump to the newest building offering three months of free rent during lease-up.  This is happening less in the current environment, given less development.

MFR.com: If you do get push back, what are your options? How can you encourage them to renew, even at a higher price?

Mike Lacy: More often than not the resident knows the market and understands that the property down the street is offering a similar home today for a much higher rate than what they are currently paying, so the renewal rate doesn’t seem so bad.  Our biggest component of achieving growth on the renewal side of the business can be attributed to our on-line renewal platform.

MFR.com: Are there some recommended increases where it’s simply better business to “invite” your residents to move, and fill that unit with a new lease at the prevailing market rate?

Mike Lacy: Some residents received such an incredible rate last year at this time that to increase them to market rate today would be a large increase and it doesn’t make sense for them or they simply can’t afford the increase.  If demand is increasing and we have the capacity to pick up a new resident at market rate then it makes perfect sense to “invite” the current resident to move.

MFR.com: How did your solution perform when the market was weak? What did you see on the way down, and what are you seeing now?

Mike Lacy: We’ve been very pleased with how the system has performed in the current environment.  YieldStar was able to recognize and react to the effects of the economic downturn earlier than we could have and because of this, we were able to price our apartments accordingly.  The system reacted to the drop off in demand and lowered rents, while keeping occupancy high.  This type of real-time price adjustment is critical to effective revenue management.  Today, demand is similar, due to the lack of new jobs being created, but supply is significantly reduced as there is a lack of new communities being developed.  What this means is that there are less homes, or supply, to rent in the market place, and an increase in demand. That being the case, the system is actively pushing rents across our portfolio.  Being able to recognize industry trends early provides a real competitive advantage and YieldStar helps us accomplish this.

MFR.com: How do you view the current state of revenue management in multifamily today? What trends have you noticed lately?

Mike Lacy: Revenue management in the multifamily housing industry seems to be changing with the times.  Looking back a few years ago when I first started working in the industry the penetration rate for revenue management systems was approximately 1 percent and today, based on what I’ve read, the rate is closer to 10 percent.  I believe this is a direct reflection of how technology has evolved over the years and the sophistication of today’s systems compared to past versions. It also illustrates companies’ willingness to incorporate technology into their operating platforms.

Revenue management is likely to continue to grow within the multifamily sector as the proven success of systems like YieldStar continue to push bottom line growth for the companies who have implemented a revenue management system.

MFR.com: How has revenue management changed the way your company does business? How has it changed the multifamily industry as a whole?

Mike Lacy: Revenue management systems have helped to put a system in place that applies science to the art of pricing.  As a result, this has brought consistency and transparency to our company pricing strategy.  We now have the ability to quickly recognize and react to changes in market demand and this creates real value for apartment operators.  Another strategic benefit is the information output from these systems allows revenue managers to incorporate their knowledge into the science when it comes to making the right pricing decisions.

As for the industry as a whole, it’s getting more competitive due to the amount of companies who have adopted revenue management systems.  As stated before, the penetration rate of these systems have grown close to 10 percent.  Compared to the past, there are now larger databases to draw information from allowing the systems to react more efficiently and on a more consistent basis.  Companies recognize this and are buying into it.

MFR.com: Let’s talk about adoption. Why do you think, at this point, we’ve still seen relatively low penetration rates in the multifamily industry with smaller and medium sized operators, even though we’ve seen generally positive results from the larger owners?

Mike Lacy: I think there are a number of factors that need to be considered. Revenue management systems are an investment and it may not be cost effective for smaller and medium sized operators to have both a system and a dedicated team of pricing specialists, like myself, to oversee their revenue management.  You also have to consider the sizes of their portfolios.  The small to medium sized operators may have more time to price their properties individually without sophisticated systems.  That said, as the market becomes more competitive and new technologies are introduced it’s reasonable to expect the penetration of these systems to increase.  It has only been a relatively short period of time since the multifamily housing industry truly adopted revenue management systems, and the operators who haven’t realized its importance as a tool to drive performance will need to use it in the future to compete.

MFR.com: Traditionally, apartment operators have measured the health of a property by its occupancy. Given the impact of revenue management within the industry, and its emphasis on total revenue, how has evaluating a property’s metrics changed?

Mike Lacy: The way we measure the success of a property has not changed, we have always looked at total revenue.  I believe this practice is consistent throughout the industry.  Occupancy will always be an important measure of the health of a property, but the realization that revenue growth is a better long-term approach to value creation has been the major focus of most operators.  In short, the success of a property is contingent upon the total revenue it generates.  Operators who look at the revenue index as opposed to the individual components can better gauge the health of their assets.

MFR.com: The office/commercial sector tends to look at things in terms of their square footage. They talk about 3 million square feet under management, for instance. Why do you think we measure ourselves in terms of units owned or under management, instead of revenue per square foot? From a revenue management perspective, which is a more useful number?

Mike Lacy: It’s important to recognize these are two different sectors driven by different fundamentals.  Although it’s all real estate, there are certain nuances in each sector and measuring in terms of units owned or under management has been ingrained in the multifamily industry.  In our case, it comes down to simplicity and what people are used to.  Our residents and investors understand the basics of rent per unit/home and this has been used extensively for some time now.  Regardless of size people look at how many homes are at a property, in a given market, or portfolio.  We have also always spoken to occupancy in terms of occupied homes, so everything converts easily.  In terms of what is more useful, it all depends on what sector you operate in.  In that way, it’s really like comparing apples to oranges.

MFR.com: What about NOI? How is this a helpful number? Are there any challenges when it comes to comparing NOI of two different properties within the same portfolio? How can the use of revenue management mitigate this challenge?

Mike Lacy: NOI is extremely important within our industry, but somewhat separate from revenue management.  While revenue management may have some influence on turnover and marketing expenses, its main focus is on revenue optimization.  As revenue managers, it’s our job to find the most efficient and accurate way to gauge the market and price our assets accordingly.

MFR.com: In more mature revenue management industries, such as gaming and hotels, total yield (or NOI) per square foot, has taken on much greater significance than occupancy itself. Will multifamily follow suit?

Mike Lacy: I don’t believe so. Revenue is the driving force in value creation within revenue management systems with the expense side of the business being focused on separately.  As systems continue to evolve you could see fees and other ancillary income focused on a bit more, but for now rents are far and above the most important measure in the multifamily housing industry.

MFR.com: Does revenue management have the potential to change the focus of keeping “the heads in the beds” to maximizing the cash profit of a property on a square-foot basis instead? Has it done so already?

Mike Lacy: I think it does.  Maximizing the cash profit of an asset is a fundamental piece of revenue management that has allowed us to step back and view revenue growth as the driving force to value creation.  Occupancy is the biggest driver of revenue, but now we make sure that “heads in the beds” are there at the right price.

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

Job Title: Pricing & Revenue Director
Location: Washington, DC or Denver, CO
Company: Archstone

Summary

Responsible for all business and technical processes related to maximizing revenue from Archstone communities such as pricing, resident screening criteria and other areas that affect demand management.

Essential Duties and Responsibilities include the following:

• Identifies and resolves pricing and revenue management issues.
• Responds to ad hoc requests for assistance from community managers, operations managers, VPs and executive level managers.
• Provides expertise on Lease Rent Options (LRO) forecast and pricing model.
• Acts as change agent to drive new ideas/policies throughout the Company.
• Conducts training sessions, formal and informal, to increase the Company’s use and competence with essential pricing and demand management software (e.g. LRO software, SafeRent, etc.).
• Suggests and implements proof of concept solutions for innovative business intelligence/decision support reporting; provides enhancements to essential pricing and demand management software and any other processes to improve revenue performance.
• Monitors key performance indicators and suggests corrective actions to Operations. Conducts quarterly reviews with Operations management.
• Coordinates activities with IT to move from proof-of-concept to “productized” solutions.
• Functions as subject matter expert on SafeRent and other demand-related processes and software.
• Handles other pricing and demand management-related tasks as assigned by GVP, Pricing and Revenue Management

Qualifications

• Bachelor’s degree (B.A.) from four-year college or university; and five years experience in pricing and revenue management or related field and/or training; or equivalent combination of education and experience.
• Extensive knowledge of key revenue management principles.
• Working knowledge with both business processes and IT/software processes.
• Intermediate MS Word, Excel and Access skills.
• Intermediate LRO skills preferred.
• Basic knowledge of Oracle, SQL or similar software.

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