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.

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.

The trend is taking shape just as owners are experiencing somewhat surprising pricing power, in the midst of a tepid recovery where broader prices, including those for consumer goods, have remained relatively flat and inflation has been virtually non-existent.

Just check out this article from Multifamily Executive, which delves into the topic of many REITs actually pushing their pricing past what their revenue management systems are recommending. In a sign that apartment pricing fluctuations are often forward-looking tells of the larger economy, for multifamily owners, today’s pricing power is very real.

“Our turnover in the 3^rd quarter of 2010 decreased 4.5 percent compared to last year,” says Glenn Chmura, LRO Pricing Manager at Colonial Property Trust, which also pushed rents 4.5 percent past the numbers LRO was recommending in the 3^rd quarter. “Residents are very sticky right now.”

Chmura says the uptick and increased stickiness makes sense, since many of the events that typically drive residents to move out are muted right now.

“The economy has improved somewhat, so move outs due to job losses are down,” he explains. “At the same time, rents have improved enough that it is not financially feasible from a resident’s perspective to pay moving costs and move to another, similar quality property, only to have to pay a similar rate to what was in their renewal offer.”

He also points out that the while it’s on the mend, the economy still hasn’t improved enough for home buying to increase. For many residents, all that adds up to the math of simple inertia: they’re not going anywhere as long as other forces don’t push them to move.

“As long as a resident is getting excellent service, and not experiencing a lifestyle change, they’re staying put,” Chmura says.

Declining homeownership rates may indeed be adding a little extra stick to that pricing power, especially when you consider the results of the U.S. Census Bureau’s latest American Community Survey.

The survey put 2009 homeownership at 65.9 percent, versus 67.3 percent in 2006. What’s more, it found that renter-occupied homes accounted for 34.1 percent of all households, nearing the 10-year high of 34.7 percent. Finally, among the darlings of multifamily’s eyes — the twenty-something renters of its target market — the impacts have been even greater: homeownership for those 25 to 29 years old dropped by 10 percent, versus a 5 percent decline for those 35 to 44, according to Fannie Mae’s 2010 Own-Rent Analysis.

Given those variables, Chmura says the drop in turnover “is expected at this point in the recovery cycle.”

And he’s not alone. Paula Poskon, a senior research analyst with Robert W. Baird, told Multifamily Executive’s Les Shaver that the additional pricing power wasn’t that surprising after all. “People could push rents faster than software if tenants are staying longer and occupancy is going up,” she told the magazine.

Of course, both rents and occupancy have been going up, giving owners that much more leverage right now, even when other industries have zero pricing power. The fact that apartment operators now have revenue management tools to help them execute on the price increases is making the results that much more striking.

Carrollton, Texas-based MPF Research, which tracks rental trends nationally and supports RealPage’s YieldStar Price Optimizer revenue management tool, reported rent growth went from negative 4.5 percent in Q3 2009 to positive 1.2 percent in Q3 2010, a total upward spread of 5.7 percent from a year earlier. Q3 represented the tipping point for the year, and marked the first time rent growth had been positive since 2008. By the end of 2010, rents had climbed 2.5 percent, a total gain of more than 7 percent since the market bottomed.

All in all, even with the seasonality of Q4 slowing the ascent slightly, 2010 was a banner year for the apartment industry. “It’s a great story, because first half numbers were already really strong,” says Greg Willett, vice president of research and analysis for MPF Research, who noted that overall occupancy stood at 93.5 percent at the end of 2010. And 2011 promises to be even better: MPF is now forecasting an additional 5 percent rent growth for the year. “Five percent rent growth is a pretty big number,” Willett says.

At the same time, such new-found pricing power, along with uber-sticky residents, has introduced a new question into the national discourse of the multifamily recovery. Namely, as much of the country continues to struggle with flat wages and tight job prospects, how should apartment operators approach this industry-wide embarrassment of riches, while renewing existing leases priced a year ago at today’s prevailing — and often significantly higher — rates?

“Almost all of the markets across the United States are dealing with the backend of the fire sales from 2009,” says Tammy Farley, principal at the Atlanta-based Rainmaker Group, which sells the LRO revenue management software. “Now, they’re struggling with the right way to adjust prices higher, and getting past the emotional impact of raising rents on their existing residents.”

Of course, doing just that – maximizing rental income from new and existing residents, while taking the emotion out of pricing decisions – is exactly what revenue management programs are supposed to do, and it’s hard to imagine a better time than right now to put them to work.

Yet, even when operators have those systems in place, it can be tough to turn the dial up, especially for leasing agents who are still gun shy from the occupancy hits they took in 2009, and have to look residents in the eye every day.

“Right now, as a management company, how do you deal with this as a business and say, ‘We appreciate you living here, but the apartment that you were paying $750 for now costs $1,000?’” Farley asks. “We’re seeing it across the board.”

Indeed, apartment pros are so sensitive about the topic right now that few operators wanted to comment to MultifamilyRevenue.com for this article. One national REIT voiced concerns over being portrayed as “the aggressive, rent-gouging landlord,” fearing that whatever it said, its words would come back to bite it.

Yet, like it or not, apartment operators – especially those who use revenue management tools – are in the business of maximizing returns for their investors. That means that even during economic environments such as this, it’s their job to raise the rent on existing residents, and sign new leases at the highest rates the market will bear.

“Our company runs conventional, market rate properties. Our goal is always to bring everyone up to the current, prevailing market rate for an apartment,” Colonial’s Chmura says. “If a resident just can’t afford the increase we’re pushing, we try to help them transfer to one of our sister communities that may still be in their price range. But the end of the day, apartments are still temporary housing, and for one reason or another, residents eventually move out.”

The difference is that for residents renting apartments today, “eventually” is still very far away, which means they’ll continue to stick around, even as rents rise further. And that’s making 2011 look like a very good year, indeed.

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.

Atlanta, GA (PRWEB) November 3, 2009 — Every company is addressing the current market challenges differently; some more aggressively and successfully than others. In late 2008, Lincoln Property Company decided to test a new price setting process to see if it could improve revenue. Lincoln’s executives designed a scientific test of the newest multifamily housing revenue management technology and used it at eight of their communities in separate markets. To ensure an objective evaluation, they paired test properties with similar communities in the same markets that continued to set prices with their customary process. The results proved a definite increase in lease rents at the automated properties – in spite of the economy.

“Seven of eight properties using automated rate setting had better results than our control group setting rates manually,” said Scott Wilder, senior VP, property management for the Lincoln Property Company residential division (shown at left). “Our perception entering the test was that we would activate the ‘black box’ and it would do the thinking. We were encouraged how engaged our team became; by using LRO and contributing to our weekly pricing calls, they became more focused on rate setting and the factors that drive revenue.”

Lincoln Property Company has a corporate culture of diligent pricing analysis and rate setting. “We are good at what we do but wanted to evaluate automated multifamily revenue management software tools and test the one we thought would be the best fit,” Wilder said. The company selected the LRO system, from The Rainmaker Group, which is widely used in the multifamily industry.

4.3% lift from LRO
Lincoln, which manages more than 350 conventional communities nationwide, began its six-month pilot in February 2009 with eight test communities using LRO to set rates, while staff at eight control properties continued their established price-setting process. To ensure test results were valid nationally, Lincoln selected communities in the Atlanta, Dallas, and South Florida markets. At the pilot’s conclusion, LRO properties showed a 4.3% lift over the eight control properties. The LRO system analyzed hundreds of historic and current economic, market, and comp-set variables, and traffic information to deliver updated rate recommendations daily.

“The surprise was the LRO recommendations caused our on-site and regional managers to engage more with their markets and the price-setting data and became more familiar with who their real competitors were and why they were gaining or losing leases,” said Wilder. “Our managers do a great job of rate setting, but the automated system is more detailed and looks at many more variables than you would think of including manually.”

Market-based pricing – minus emotion
Another surprise was how the pricing system responded to the soft market. “LRO’s analysis of market conditions, including guest traffic, revealed that significantly lowering rates was unlikely to produce a proportional increase in demand in the softening market,” said Wilder. “We took a measured approach and accepted the systems recommendation that we lower rates in small increments. This kept our LRO properties from deeply reducing rates unnecessarily.”

Looking forward to market recovery
“We ran our six-month pilot in a very soft market and the system helped us,” Wilder said. “LRO was good in the down market and when the economy corrects, the real value will come in the renewal cycle. Renewal rate setting is especially difficult where managers have relationships within their community. LRO’s renewal price setting removes the emotion from the decision. I expect higher revenue will be the result.”

“The transition to automated pricing is all about change management,” Wilder said. “Shifting communities to automated pricing changes the way we do business. LRO’s most solid benefit is that it helps our onsite people and regional managers do a better job. The longer you use it, the better you become at optimizing rents.” Lincoln expects to roll out the LRO revenue management system to its owned properties over the next two years and recommend revenue management to all their third party clients.