To kick off our regular series of Revenue Manager Q & A interviews, we chatted with Hughes about the revenue management career path within multifamily, the adoption of yield management in the current environment and how revenue management principles are slowly but surely changing key metrics for the apartment industry. Check back for Part 2 of our interview, coming soon.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hughes: Occupancy is a legacy metric.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

You can access the full exchange here.

New White Paper: Archstone Test Shows 1.5% Revenue Increase from Call Center’s Capture of Incremental Leads

Revenue gains in 40-community trial validated by international independent consulting firm

Emeryville, CA, February 25, 2010 – Multifamily strategy consultant Steve Lefkovits, operator of MultifamilyRevenue.com, announced the release of a white paper documenting a nine-month test by Archstone, a leading multifamily operator.  The test evaluated multifamily revenue management using The Rainmaker Group’s LRO (“LRO”) lease rent optimization system and professional prospect guest card creation utilizing Level One’s Central Leasing Office.  Results of the study showed that Archstone’s communities that used Level One’s call center and automated lease rate optimization from LRO generated 1.5% more revenue than test communities relying on self-management of inbound phone call leads.

“Archstone’s nine-month, 40-community test of professional lead handling and guest card creation proved that increased lead volume can drive higher revenue per unit, even in a soft or declining market,” said Steve Lefkovits, who authored the white paper documenting the test. “Archstone’s 1.5% revenue boost resulted from harvesting new leads from existing marketing sources and automatically feeding that prospect traffic to the LRO system.  LRO moved rents in response to demand, increasing revenue per unit in the test properties. “We estimate that on a “typical” property, this kind of result would equate to an incremental $45,000 – $67,500 in annual net operating income.  This new white paper (linked here) lays out the analysis.”

The Archstone trial compared 20 test properties with 7,200 units using Level One’s call center against an equal number of properties in a control group that did not use the call center Level One answered the phone 98-99% of the time, versus 50-60% of the time at the control properties.  Additional guest cards were captured, effectively increasing demand for the properties.  LRO set rental rates based on scientific demand analysis in both the test and control groups.  The 1.5% revenue increase in the test group was validated by an independent international consulting firm.  “The revenue increase was not from increased occupancy, it was from real-time visibility into the new, higher demand,” Lefkovits explained.  It’s exciting that even a sophisticated company like Archstone can increase prospect leads and income by having 98-99% of their inbound sales calls answered.”

To download the white paper, please use this link below:

http://www.multifamilyrevenue.com/wp-content/uploads/2010/02/archstone_increases_revenue_using_levelone_lro.pdf

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

The AMLI case study is important because the company takes a “people and process first” approach to performance.  They treat revenue management as simply one form of optimization, a technology among a number of quantifiable efforts they use to drive incremental results.  AMLI has about 22,000 apartment homes in 11 different markets.  They are headquartered in Chicago.  Hear from Steve Small directly below.

Part 1 – 2:20  “AMLI’s Use of Revenue Management”

Part 2 – 2:40  “Elasticity in Revenue Management”

Part 3 – 5:36  “Monitoring and Reporting Tools”

Part 4 – 2:18  “Pricing Console – User Interface”

Part 5 – 3:30  “Lead-to-Lease Success”