Revenue Manager Q & A: AMLI’s Rich Hughes, Part 1

By Steve Lefkovits | July 14, 2010

Archstone’s Donald Davidoff is widely viewed as the leading pioneer of revenue management in the multifamily industry. But he’s also helped bring up a generation of revenue managers who now apply the science – and art – of revenue management across the apartment industry. Among them is Rich Hughes, revenue manager at Chicago-based AMLI Residential. While working with Davidoff at Archstone, Hughes helped fine tune what is now the Rainmaker Group’s LRO pricing solution.

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.

Posted in Case Studies, Featured, REITs, User Experiences | Tagged , , , , , , , , , | Leave a comment

RevMan in the Recession: Listen to Davidoff and Steiner Jovanovic

By Joe Bousquin | July 8, 2010

If you still need evidence of how revenue management can help stop the bleeding in a falling market, or get you to the top faster in a rising one, listen to the tete-a-tete between Archstone’s Donald Davidoff and RealPage’s Janine Steiner Jovanovic during the Multifamily Executive Virtual Conference.

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.

Posted in Case Studies, Conferences, Presentations, User Experiences | Tagged , , , , , , , | Leave a comment

RealWorld 2010 Preview: YieldStar, Revenue Management and a Higher Upside

By Joe Bousquin | June 30, 2010

The apartment industry is about to get an in-depth look under the hood of the YieldStar Price Optimizer revenue management solution.

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

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

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

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

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

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

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

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

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

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

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

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

Posted in Featured | Tagged , , , , | Leave a comment

A Salve for the Recession: Revenue Management in the Apartment Industry

By Joe Bousquin | June 6, 2010

Joe Bousquin

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

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

***

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

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

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

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

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

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

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

Jennifer Staciokas and Gail Duke speaking at the 2010 AIM Conference.Jennifer Staciokas and Gail Duke speaking at the 2010 AIM Conference.


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

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

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

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

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

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

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

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

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

Posted in Case Studies, Featured, REITs | Tagged , , , , , | 2 Comments