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.

Dubbed Market Comps, it’s the latest offering from the real-time availability experts at Scottsdale, Ariz.-based VautWare, and is powered by listings data from more than 25,000 properties who advertise on Rent.com.

With an interface that’s way more simple than the firm’s PadZing offering, which touted itself as the Zillow for multifamily before Zillow starting doing multifamily, Market Comps offers community managers a single-screen view into their competitors’ pricing. It shows them where their own properties stack up on average rent and rent per square foot, even unit-specific pricing for different floor plans.

Market Comps' baseline property comparison screen.

Not only does that hold the promise of taking a big load off leasing agents who spend at least part of their jobs calling the competition for current rents, it’s a first step toward automated pricing for smaller operators. What’s more, it provides an alternative to full-blown software packages costing tens of thousands of dollars. Multifamily RevMan watchers have often pointed to the price points of those solutions as one of the major impediments to wider-scale adoption of the technology by small and mid-size operators.

“At a minimum, its a first cut of a poor man’s revenue management system,” said Mike Mueller, VaultWare’s CEO. “It’s property specific and takes just minutes to set up. We made it super simple for our industry.”

After fielding feedback from users that PadZing was complicated and confusing to use, VaultWare developed Market Comps to do one thing well: show you the actual pricing at your comps, updated once a week, and where you stack up against them, on one screen. Gone are PadZing’s cumbersome mapping tools, or the myriad filters you could apply to the wealth of data there.

No, instead of giving you too much, Market Comps gives you more by giving you less. The tool has two basic views, graphing your property against your immediate comps, and comparing your property to those around it by unit type. You can pull down tabs for average rent, by unit type, for the last 1 to 24 months, and you can export any of it to Excel for a property-by-property comparison of how you’re doing against your peers. Click here for a video tour of the tool.

Market Comps' floor plan comparisons and reports exported to Excel.

Finally, you can set up e-mail alerts to receive notification when your own rents hit a pre-determined trigger against your competition. For example, if you want to know when your 1 bedrooms fall outside of a range within $25 of your nearest comp, Market Comps will send you an email telling you so.

“Most other sources are expensive and already out of date when purchased,” said Mike Cornell, VaultWare’s president. “Market Comps does the work for the properties and ensures they are aware of changes to their market conditions as they happen rather than reacting to a trend that happened weeks or months ago.”

Market Comps' email alert tool

Perhaps most compelling about the offering is price: the basic version is free for VaultWare and Rent.com customers, while the Premium offering – which allows you to see your property-by-property comp report, export floor plans and set alerts – is $300 a year. At this time, the product is only available to customers of the those two firms.

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

With the spring lease up season upon us, MFR.com was lucky enough to huddle with Waterton Residential’s Barney Pullam. With 15,000 units in markets from Washington, D.C. to Southern California, and the core of his portfolio in Chicago, he’s got a balanced, diversified view on what’s happening with rents now, and how revenue management tools are gaming the recovery.

A 20-year vet in multifamily, he gave us the inside scoop on pushing rents as much as 20 percent, the incremental mind-shift that comes with implementing revenue management, and how to toe the line with renewing residents in today’s rising market.

MultifamilyRevenue.com: Waterton’s been using revenue management for the last two years, which I imagine was an interesting window of time to implement this technology. I understand you use the LRO solution from the Rainmaker Group. How has it performed in the current environment? What did you see on the way down, and what are you seeing now?

Barney Pullam, VP of Business Process, Waterton Residential: That’s right, we began implementing LRO in Q1 of 2009, and had it fully deployed by Q3.

As you can imagine, most of our markets at the time were caught up in the slow economy, and had higher exposures. What was interesting was that LRO started reducing rents in an effort to get those exposures down, but it did it in an incremental way, testing each level of lower rents as it went.

The result was that it started moving our rates more often, but by a lesser degree. Prior to LRO we would adjust effective rents by adding or reducing the amount of the concession. Concessions might increase from one month free to two months free as our vacancy increased. In actuality, that meant a swing in revenue of about 8.5 percent.

LRO, on the other hand, came in and adjusted rental rates just 2 or 2.5 percent during a given week, and then gauged any resulting change in occupancy before setting the next week’s prices. Basically, it took baby steps, which was interesting.

The other lesson learned we’ve learned from running revenue management is that it puts greater emphasis on the availability of a specific unit type. I really think that helps you to see the trend early, and react and capitalize on the changing market.

On the way back up, LRO did substantially the same thing: it made lots of little adjustments in the range of 2 to 3 percent per week. If those new rents were well received, then it pushed rents higher in an effort to maximize the overall income.

Regardless of the direction, we found the adjustments to be more frequent but at smaller increments than our prior approach. It tests the waters, figures out what the market is willing to accept and goes from there. It gives you a very systematic approach to pricing.

MFR.com: What are you seeing in terms of renewal rates using your revenue management tools today? Leases priced a year ago were presumably much lower.

Pullam: We implemented a more aggressive renewal pricing strategy in Q4 of 2010. Renewal rates have varied by market, of course, and we’ve seen a broad range. We’ve seen renewal offers of just 3 percent in our softer markets, but up to and over 17 percent in our stronger regions.

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

Pullam: For our most recent renewal offers on leases expiring in June, we are seeing average increases at 6 percent or better. In general, our communities have been following the renewal offers generated from LRO; any deviations from what the tool recommends have to be approved by the regional manager.

What’s interesting, though, is on new move-ins. In some instances, we have seen our communities push new rents even beyond what the tool recommends.

MFR.com: How is turnover tracking compared to past periods? Are residents “stickier” today? Why do you think we’re seeing this trend now?

Pullam: We have noticed turnover remaining relatively flat. Waterton has averaged a retention rate between 43 and 46 percent of our expiring leases.

I think residents are stickier, and are more accepting to renew at the higher rent levels today. We’ve even seen residents renew leases at rates 20 percent higher than what they had been paying. That’s pretty encouraging.

Of course, we’re also seeing some turnover as residents shop for a lower rate. But that’s fine, we can’t meet everyone’s price point.

I think there are a few reasons why residents are staying put. The first point is that they’re taking their time to shop and understand the going rate for apartments in their respective market. Also, I do think most people realize they received a better deal last year as a result of the economy and therefore are willing to accept a reasonable increase.

From there, it’s really just this economy we’re in. There’s been minimal job growth, and fewer opportunities for advancement at the jobs they have. In a growing economy, you would see people move in because of a new job. Today, they’re not moving out until that opportunity comes along.

MFR.com: You wrote a recent article for your company newsletter that was pretty interesting. You wrote, “We don’t want to be 98 percent occupied as those higher occupancies are reached by compressing rents; nor do we want to achieve a renewal conversion percentage greater than 60 percent.” Can you expand on that? How do you determine the right mix of renewals vs. new leases?

Pullam: It’s interesting. When you start using revenue management, you’ve got to break away from managing toward occupancy. Instead, it’s all about the overall availability of that specific unit type.

If you have a few one bedrooms sitting vacant for a little while, but your overall availability is under 7 percent for one bedrooms, there is no reason to lower the price. Instead, you’ve got to trust it, and let the tool do its job, which is to maximize rents.

If you do that and the apartments still don’t lease, LRO will adjust the pricing down. In some ways, it’s a hands-off exercise.

But in regards to the mix of renewals versus new leases, we don’t have a hard and fast rule. Our experience shows that when retention rates push north of 60 percent, we’re not being aggressive enough.

The challenge with renewals is that you’re putting those offers out 90 days before the lease expires, so you’re really selling a future rate, and that becomes even more challenging when you’re coming out of a slow season and going into a busy one. Sometimes, you need to take that leap of faith and push the higher renewal offer.

We like LRO because it give us the ability to set close to 200 parameters to maximize pricing. We pay a lot of attention to exposure, and leasing velocity and of course, we always have our eye on the competition. But one of our favorite features is looking at the aggressiveness parameter in LRO. It basically helps determines how aggressive LRO will be in pushing your rents, and can be a very useful tool.

MFR.com: We’ve been having an interesting discussion on the site and the LinkedIn Apartment Pricing Professionals group lately about factoring turn costs into your RevMan tools. Are you factoring in turn and marketing costs when you’re setting goals for pricing? How do you determine the point when a new lease starts paying for the cost of turning the unit?

Pullam: We do consider turn costs. LRO allows the user the ability to factor in turnover and marketing costs when establishing pricing for both move ins and renewals. We look at all costs associated with turning the apartment, including marketing, maintenance and vacancy, and input that value into to model.

MFR.com: What are the best practices you’re using to explain the market to residents now, while remaining firm on price?

Pullam: You know, one of our community managers was talking about this recently, and what she said was pretty straight forward, but it made sense to me. She’s really emphasizing the importance of taking the time to speak with the resident regarding the renewal increase. You really can’t just send a renewal letter. You’ve got to call and speak with the resident about the offer. It’s pretty fundamental, but it’s so true, too. Site teams need to sit down and talk with residents about what’s happening in the industry.

We’re reminding them that rents were lower when they moved in because the economy was pretty bad. Now that things are getting better, rents are increasing. We also encourage our residents to shop around to confirm that our prices are in line with the market.

MFR.com: What trends do you anticipate for the rest of 2011?

Pullam: We think the remainder of 2011 is going to show continued, solid growth in both new leases and renewal rates. We’re going to focus on continuing to push rents until we find the ceiling. Once we get there, we’ll focus on maintaining those higher levels.

MFR.com: Thank you for your time.

Pullam: You’re welcome, thanks for the opportunity.

Alliance Residential Company's Blerim Zeqiri

With a footprint of 45,000 units spread geographically from coast to coast, Alliance Residential Company runs what’s perhaps one of the most representative portfolios of properties in the multifamily business. So when the company announced recently that they were promoting Blerim Zeqiri from a position in their acquisitions department to Director of Revenue and Research for the company, we were all ears. We caught up with him to chat about running RevMan in one of the toughest markets around – Las Vegas – what to do today with renewals and strategically applying the technology in a portfolio that is both owned and third-party managed.

MultifamilyRevenue.com: Tell us about your background and your recent promotion to Director of Revenue and Research at Alliance. How did you become a revenue management professional in multifamily?

Blerim Zeqiri, director of revenue and research, Alliance Residential Company: I started working for Alliance about 5 years ago in acquisitions focusing primarily in underwriting, market research, and investment analysis. After about a year and a half in acquisitions I started working in the newly created asset management department where I have worked until now. As an asset manager I was involved mainly in Alliance owned assets focusing on equity contributions and distributions, forecasting and budgeting, longer term asset positioning and strategies, and the like. Considering my experience in acquisitions and asset management, Brad Cribbins (SVP and my boss while I was an Asset Manager) and Jim Krohn (our COO), thought I would be a good fit to create and run the revenue management and research department for Alliance, which I humbly accepted.

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

Blerim Zeqiri: We use LRO by Rainmaker.

MFR.com: How has your solution performed in the current environment? What did you see on the way down, and what are you seeing now?

Blerim Zeqiri: We started testing LRO at the end of Q2 last year on four test properties and paired each property with a control site for a more comprehensive comparison accounting for market influences.  Since then and with addition of more properties, we have seen revenue growth in the 1%-5% range.

That said, we did not have a revenue management system in place when the markets crashed and revenue decreased, but during our testing phase we did select a market that still continues to be a challenge –Las Vegas. With unemployment hovering around 15% and vacancies in double digits, we have been able to test LRO rather well in a challenging market and what we have seen so far is mostly rent preservation with slight increases when possible.

We have used LRO to help us maintain high occupancy rates which has allowed for some revenue increases even in a tough market. In other recovering markets such as Phoenix or Albuquerque, the revenue lift has been accelerated by LRO and it has ranged from 3.5%-5%.

MFR.com: As both an owner and third-party manager, your firm has a somewhat unique perspective when it comes to revenue management. What commonalities do you see in applying RevMan in those two portfolios? Is it easier to run RevMan in one than the other?

Blerim Zeqiri: I believe we are in a great position as an owner and third-party manager. As owners, we take an investor’s standpoint. This gives us a unique perspective as a third-party manager because we understand our investors’ goals and we can apply appropriate strategies that will advance their interests.

No doubt there are commonalities. As I mentioned earlier, geographically we are very diverse, so we own assets in different performing markets. In addition, we also have a wide variety of asset structures – some that are undergoing long term financing, or other ones we are positioning for disposition.

We can apply these same strategies on the revenue management side for our third-party deals depending on what the objective is. Chances are that whatever the property unique circumstances are on a third-party deal, we either have an asset that is somewhat in a similar situation, or we have previous experience from one of our own deals.

MFR.com: Have your third-party clients asked for revenue management as a service? If so, is this a differentiator – and additional source of revenue – for managers such as yourself?

Blerim Zeqiri: No, they have not, and we do not intend to convert the Revenue and Research department into an outsourcing tool for clients whose assets we do not manage. We started this department to advance our own long term investment strategies and we felt that it is only right we do the same for our third-party partners.

If we are managing an asset for a third-party client and they want to move it to LRO we will do so as a complimentary service. We have already committed resources to this department for our own assets so there is plenty of capacity to provide this service to our third-party clients. If in the future due to an expansion of services we need to commit even more resources, we might ask from our clients to share some of these costs, but even then it will be minimal and will not be profit driven.

MFR.com: How do you support property staff with research and pricing information?

Blerim Zeqiri: From a property staff level, we first go over macroeconomic research when I am setting global parameters for revenue on a specific property. Then we drill down to submarket and even property specific competitive advantages. Our strategy is to manage revenue as it is driven by research on macro and micro economic level. With a revenue management system in place it is easy to get lazy and apply the same parameters across the board, but we believe that at the core real estate is local and each investment has its unique characteristics that must be taken into account.

From a price perspective, I have weekly pricing calls with each one of our teams that is on LRO and it generally includes Business Managers, Regional Managers, and VPs. These calls help us review pricing, leasing and traffic, competitor trends and the wider submarket, and renewal efforts.

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

Blerim Zeqiri: We are by no means veterans when it comes to revenue management systems, but we have strongly embraced the concept after the testing phase delivered promising results. We intend to approach revenue management with the idea of utilizing LRO for what it does best: forecasting exposure, supply and demand, amenity based pricing, detailed expiration management and the like.

At the same time we understand that revenue management systems are not omniscient and at the end of the day depend on people who are making decisions and influencing the system. Therefore, we are educating our staff to understand how the revenue management system operates so they see where pricing is going before LRO makes a decision. I emphasize often to our teams that our staff is indispensable and their role not only has not diminished with the rollout of LRO, but quite the opposite – it has allowed them to focus on the human element of our business such as training and mentoring of our staff, customer service, and marketing and sales. These are elements that math algorithms and high structured finance cannot substitute.

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?

Blerim Zeqiri: I believe it does and to some extend it already has. Old habits die hard as the saying goes, so it will take some time for the concept of higher occupancy at any price to be reconsidered by everyone. But revenue management has played a role that has been paramount insofar as to help investors and operators see that the best equilibrium comes not when vacancy is 2%-3% or somewhere close to that, but rather when it intersects with the highest potential for revenue generation.

MFR.com: What are you seeing in terms of renewal rates today? Leases priced a year ago were presumably much lower. What’s the average renewal increase recommended by your revenue management tool in today’s market?

Blerim Zeqiri: As is to be expected, renewal growth rates have varied by market conditions. However almost across the board there have been increases – at least in markets we are in. This as well is to be expected considering we are leaving a period of unprecedented low rental rates.  In the Phoenix metro (North Scottsdale), for example we have seen renewal rates ranging from 1% to 15%, in part due to when that resident initially moved in. An average of around 6% rate is more standard though. We are seeing a similar case in Dallas.

We are following renewal recommendation closely since we agree with the concept of burning off concessions and recouping rents, especially when new move-in rents are strong and improving.

In instances where market conditions continue to improve, I have gone back and firmed up increases on renewals further than initial system recommendations. This has been possible when exposure is on the decline and rents are going up.

MFR.com: How is turnover tracking, compared to past periods? Are residents “stickier” today, and more apt to renew at a higher rate? If so, why do you think we’re seeing this trend now, even as wages remain relatively flat?

Blerim Zeqiri: Inevitably with an increase in renewal rates turnover has increased as well. This is something we anticipated and have budgeted for. Residents are getting accustomed to these increases as well and are smart enough to understand that after a steady period of decline in rents, increases are to follow.

We have had a case where a resident gave notice after a renewal increase only to come back a couple of weeks later (after shopping around) and lease a new apartment at a 3% premium to what the renewal increase was. He liked the property and would rather not move if savings were not substantial.

Overall though, as markets crashed in 2008, the industry was quick to react and lower rates in order to preserve occupancy. This was sometimes necessary particularly in markets with a high level of competition from the single-family shadow market. In this environment cost cutting was the only way forward. However, with debt service levels staying the same and many expenses being fixed (or small margin for cutback), these reductions were unsustainable in the long term. Most owners and operators have realized this.

MFR.com: If you get push back from residents on renewal increases, what are your options? What are the best practices you use to explain the market to residents, while remaining firm on the recommended price?

Blerim Zeqiri: During training when we rollout a new property on revenue management system or on weekly calls, I often reiterate to our teams that the best residents are the ones we already have. We truly would like not to lose any residents, but we also understand that this is impossible. Most of our residents understand this as well and they appreciate our staff for trying to find a solution for them to keep them happy and as residents even when it involves rental increases. We approach every renewal increase with an explanation on why it happened. We explain to our residents the shift in market trends which has resulted in rental increases across the market, but especially for new residents moving in. Knowing that we value our residents and give them the right of first refusal –for the lack of better term –over new residents has helped us retain many residents. We also explain the costs of moving, but we mostly try to understand what would the resident want to see improve in our community for the higher price they are willing pay to live there.

MFR.com: Beyond using it as a pricing tool, what other potential uses do you see for revenue management tools in the multifamily industry?

Blerim Zeqiri: In the immediate term, revenue management systems will offer a degree of consistency and fairness to residents – especially as they get to know this evolving trend in the industry.

In the long term however, I believe revenue management tools will help the multifamily industry foster an appreciation not only for a higher level of sophistication in pricing, but for the time it will free allowing operators to focus on client needs. The benefits of this focus will not be tangible immediately but will certainly become beneficial to the whole multifamily industry as the “stock “ of the industry continues to appreciate in the eyes of clients and investors.

MFR.com: Thank you.

Editor’s note: Don’t forget to mark your calendar for the inaugural Apartment Revenue Management Conference September 12-14, 2011 in Park City, Utah.  You’re gonna wanna be there.

Yet, like any running tally, we know this list isn’t complete. The fact that it’s perpetually out of date (and yes, sometimes more than a little) is testament to the growth of RevMan in multifamily. So once again, we’re asking our readers to contribute. Who’s not on this list that should be? Send me an email here.

• AIMCO (PROFIT by Pricing Revenue Optimization Systems)
• Alliance Residential (LRO by The Rainmaker Group)
• Allison-Shelton Real Estate Services (LRO by The Rainmaker Group)
• Altman Management Companies (LRO by The Rainmaker Group)
• AMLI Residential (RentCheque)
• Apogee Residential, LLC (LRO by The Rainmaker Group)
• Archon Group (Price Optimizer by M|PF YieldStar)
• Archstone (LRO by The Rainmaker Group)
• AvalonBay Communities (LRO by The Rainmaker Group)
• Babcock Brown Residential (LRO by The Rainmaker Group)
• Berkshire Property Advisors (Price Optimizer by M|PF YieldStar)
• Carmel Partners (LRO by The Rainmaker Group)
• Camden Property Trust (Price Optimizer by M|PF YieldStar)
• Centennial Holding Company, LLC (LRO by The Rainmaker Group)
• Colonial Properties Trust (LRO by The Rainmaker Group)
• ConAm Management Company (LRO by The Rainmaker Group)
• Continental Properties Company (LRO by The Rainmaker Group)
• CWS Apartment Homes (Price Optimizer by M|PF YieldStar)
• Dominion Management, LLC (LRO by The Rainmaker Group)
• E&S Ring Management Corporation (Price Optimizer by M|PF YieldStar)
• Essex Property Trust (Price Optimizer by M|PF YieldStar)
• Equity Residential (LRO by The Rainmaker Group)
• First Choice Management Group, Inc. (LRO by The Rainmaker Group)
• First Communities (LRO by The Rainmaker Group)
• General Investment & Development (LRO by The Rainmaker Group)
• Grand Peaks Property Management (Price Optimizer by M|PF YieldStar)
• Griffis/Blessing, Inc. (Price Optimizer by M|PF YieldStar)
• Hirschfeld Properties, LLC (LRO by The Rainmaker Group)
• Holland Residential (LRO by The Rainmaker Group)
• Home Properties (LRO by The Rainmaker Group)
• IMT Residential (LRO by The Rainmaker Group)
• JBG Residential (LRO by The Rainmaker Group)
• JPI (Price Optimizer by M|PF YieldStar)
• Julian LeCraw Company (LRO by The Rainmaker Group)
• Jupiter Communities (LRO by The Rainmaker Group)
• The Kamson Corporation (LRO by The Rainmaker Group)
• Korman Residential (LRO by The Rainmaker Group)
• Landmark Residential (LRO by The Rainmaker Group)
• Laramar Group (LRO by The Rainmaker Group)
• Lincoln Properties (LRO by The Rainmaker Group)
• MC Companies (LRO by The Rainmaker Group)
• MEB Management Services (LRO by The Rainmaker Group)
• Mid-America Apartment Communities (LRO by The Rainmaker Group)
• Mission Residential (Price Optimizer by M|PF YieldStar)
• Morgan Group (Price Optimizer by M|PF YieldStar)
• Morgan Properties (LRO by The Rainmaker Group)
• NOI Capital Partners (LRO by The Rainmaker Group)
• Northland Investment Corporation (LRO by The Rainmaker Group)
• Pinnacle (Price Optimizer by M|PF YieldStar)
• Prometheus Real Estate Group, Inc. (Price Optimizer by M|PF YieldStar)
• Post Properties (LRO by The Rainmaker Group)
• PRG Real Estate Management (LRO by The Rainmaker Group)
• Regional Investment & Management (RIM) (LRO by The Rainmaker Group)
• Resource Residential (LRO by The Rainmaker Group)
• Sagebrush Capital Management (LRO by The Rainmaker Group)
• Sares-Regis (Price Optimizer by M|PF YieldStar)
• Shea Properties (Price Optimizer by M|PF YieldStar)
• Simpson Property Group (LRO by The Rainmaker Group)
• Steven D. Bell & Company (Price Optimizer by M|PF YieldStar)
• Switzenbaum & Associates (LRO by The Rainmaker Group)
• UDR, Inc. (Price Optimizer by M|PF YieldStar)
• Walton Communities (LRO by The Rainmaker Group)
• Waterton Residential (LRO by The Rainmaker Group)
• Weinstein Properties (LRO by The Rainmaker Group)
• Wilkinson Real Estate Advisors, Inc. (LRO by The Rainmaker Group)

Notice someone who’s not here who should be? Email me.

And remember, mark your calendar for the inaugural Apartment Revenue Management Conference September 12-14, 2011 in Park City, Utah.  You’re gonna wanna be there.

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.

Apartment Revenue Management Conference

* Professional multifamily investors, asset managers and general partners;
* Pricing managers and analysts;
* Property management executives; and
* Quantitative marketing managers

* Learn revenue management strategies to maximize financial yield

* Attract new investors with superior operational and pricing capabilities the way the REITs do

* Brainstorm tactics with pricing professionals from other industries

* Skeptical? Fact-find with experts about whether rent optimization works in multifamily

* Find a competitive edge as a third-party manager with new pricing tactics and metrics

* Find vendors of systems, implementation consulting and data

* For brokers and lenders too – learn what revenue management means for underwriting transactions at maximum value

…and more!

Registration will open in the first quarter of 2011. A formal call for presentations will be issued at that time. However, we encourage the informal submission of ideas, topics and speakers right now and at any time. Please contact us with your thoughts.

Media inquiries: Don Canfield, LinnellTaylor Marketing, 303-682-3942 or don [at] linnelltaylor.com

Conference program: Steve Lefkovits, MultifamilyRevenue.com (510) 444-2988 or steve [at] jtimedia.com

NAA: Paul Bergeron, National Apartment Association, (703) 797-0606 or paul [at] naahq.org.

The AIM 2010 Conference theme – Many Marketing Channels: One Goal – reflects the needs of owner/managers and their service providers to master many channels to drive and validate their impact on net operating income. AIM 2010 will feature cutting-edge business education designed to help simplify using multiple marketing channels to achieve a targeted ROI occupancy. With more than 200 companies that own and operate apartments in attendance, it’s an event you can’t afford to miss!

We’ll be meeting at the beautiful Hyatt Regency Huntington Beach Resort and Spa in Huntington Beach, California. The location is fantastic and has to be seen to be believed. It’s right on the beach with lots to see and do in the immediate area. Best yet, it’s a family-friendly resort so bring the family and stay the weekend! There’s more information about the Hyatt and how to reserve your guest room at the special AIM Conference rate at www.aimconf.com. Be sure to make your reservations soon before our room block sells out.

There’s an exceptional line-up of presenters this year. Keynote conference speakers include Google’s Sam Sebastian, Director of Local and B2B Markets; Greg Sterling, Founding Principal of Sterling Market Intelligence; Danny Sullivan, Editor in Chief of Search Engine Land; Gary Angel, President of Semphonic; and Vivek Sodera, Co-Founder of RapLeaf. AIM 2010 also features intermediate and advanced sessions specifically developed with topics and speakers that address the challenges of using multiple marketing channels.

And we’re grateful to our sponsors who make it all happen. They include Apartment All-Stars, Apartment Finder, Apartment Guide, Benson Media, Capture the Market, First Advantage SafeRent, G5 Search Marketing, Grace Hill, Level One, Move, Multi-Housing New, Numeric Analytics, On-Site.com, Property Solutions International, RealPage, Realty DataTrust (Founding Sponsor), rentbits, Spherexx.com, The Rainmaker Group, and Yardi.

True to its reputation, the AIM Conference is going to be packed with educational value, growth opportunities and plenty of networking. We’ll see you there!

Register here for AIM 2010.

Click here to view AIM 2010 press release.