What Revenue Management is NOT

By Donald Davidoff

Note: The following are strictly the personal opinions of the author and do NOT represent any official opinion or position of Archstone or any other Archstone employees.

As revenue management is increasingly adopted by the industry, it’s interesting to see how various mythologies about what “revenue management is” have spread. Some are unintended, in that ideas form and get passed on from person to person without any real vetting and suddenly become “conventional wisdom.” Others have been carried out with intent, as vendors co-opt the term for marketing and sales purposes and multifamily housing operators co-opt the term to look like they’re doing something cutting edge. Both are actually avoiding the change necessary to implement a true revenue management system.

Here are three things revenue management is NOT:

Revenue Management is NOT just software and technology.

Instead, it’s a strategic program that happens to involve technology. Anyone viewing it as a technology project will be sorely disappointed. Revenue management is a way of thinking about the apartment business, and realizing that  a box is NOT a box is NOT a box. Rather, other important dimensions matter: when the box is rented, how long it is rented and whether it is renewed. Those aspects drive differences in value.

Revenue management fundamentally changes how you view your multifamily business. It will change not only how you price, but also how you budget, how you staff and what kind of reporting and business intelligence you need. And while it does affect your IT department and resources, that’s a necessary, albeit not sufficient, condition to succeed. Revenue management requires CEO or COO commitment – not  just involvement. A technology project, on the other hand, just needs money and a sponsor somewhere in the organization. Not sure of the difference between commitment and involvement? Just think about bacon and eggs: —while the chicken is involved, the pig is committed!

Revenue Management is NOT simply tracking and responding to your comps.

Knowledge of your comps’ pricing is important in setting rents, but it’s far from the most important piece of information for revenue management. Understanding your own value proposition, your own demand stream and your own supply behavior (e.g. what percentage of your leases will terminate early) are all more important, by a long shot. In fact, you can operate a good revenue management system with no comp data if you have to—we’ve done that at Archstone in places where it is very difficult to find reliable comps.

So while comp data can be useful — and a comp data tracking and response system is  better than nothing — it is NOT revenue management.

Revenue Management is NOT cheap.

It’s an alluring idea: maybe I can  get 70-80 percent of the benefit at a fraction of the cost. If you don’t really believe in RM, it sounds like an even better idea because, at least you’ll learn something along the way, right? Even if you ignore the fact that leaving 20-30 percent of your revenue lift on the table results in negative ROI, the simple fact is that the idea just isn’t true.

There is no such thing as a “poor man’s RM” because you can’t get most of the benefit with only simple tools. A good revenue management system involves sophisticated math that takes highly trained modelers (both RealPage and LRO have highly specialized staff for this very purpose) and programmers to develop the technology. That costs something. We all may want something for nothing, but it’s important to remember you get what you pay for. I know all multifamily companies need to be cost conscious, but I’m always surprised when an otherwise smart executive thinks  buying pricing software from a salesperson who emphasizes the low cost of their product is a good idea.

If you’re trying to maximize your own revenues, does it make sense to choose the option whose primary advantage is its low cost? A good system takes time, effort and money to develop. Just ask the two current software providers how many thousands of hours have gone into developing their systems. Execs in this industry, as in others, should be prepared to pay a fair price for them.

The author is Senior Vice President, Strategic Systems for Archstone.

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

The nuggets above came, respectively, from our interviews with Colonial’s Glenn Chmura, AMLI’s Rich Hughes, and the godfather of multifamily RevMan himself, Archstone’s Donald Davidoff.

Along the way, we’ve also heard about the dynamic and compelling corporate housing market from Oakwood’s Jeff Young – as well as how renting short-term units isn’t that much different from selling cruises, renting cars or even getting people to go to Disneyland. Lately, we heard about how UDR’s Mike Lacy transitioned from an acquisitions role at the REIT to help determine pricing for its 58,796 units.

Using this industry-wide knowledge base as a foundation, we wanted to open it up to you, noble MFR.com reader, to tell us what topics you’d like to hear more about when it comes to using RevMan in the apartment business. Is it RevMan’s potential to act as a valuation tool on the underwriting and M&A side? Is it mixing in risk-based rents and lease terms based on an applicants’ screening criteria? Or is it using RevMan to develop lifetime customers, much as UDR has started to do with its renewals engine?

Tell us what your thoughts are for the potential of RevMan in the multifamily industry. Is this technology here to stay, or will it have all the relevance of TheGlobe.com? What has surprised you – or even underwhelmed you – about using this technology to price apartments? What applications do you see for it down the road?

Of course, if you’re a revenue manager in the industry, we’d love to include you in the MFR.com interview, too, so let us know if you, or someone you know, would make for a good read. Send thoughts, comments and suggestions to joe@ameredit.com.

Finally, don’t forget to  mark your calendar for the inaugural Apartment Revenue Management Conference September 12-14, 2011 in Park City, Utah.  It’s an event you won’t want to miss.

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.

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.

            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.

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.