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.

Mid-career Americans who didn’t get in before – or have finally gotten out from underneath a toxic mortgage – now see owning a home as more of a nightmare than a dream. For them, renting may seem more desirable – or indeed, be the only option – just as banks continue to shy away from writing more mortgages.

Then, there’s the fact that restricted supply – nobody’s built during the recession, either — helped push rents into the black at the end of 2010 for the first time in two years; they’re now 7 percent higher than when the market bottomed in 3Q 2008, and MPF YieldStar is projecting them to gain another 5 percent in 2011.

For multifamily owners and operators, that perfect rainbow of circumstance equates to the beginning of a golden era in 2011.

At the same time, the industry has been adopting revenue management technologies at an increasingly swift pace. The Rainmaker Group, maker of LRO software, had a banner year in 2010, almost doubling its multifamily client count to approximately 65 companies, according to MFR.com’s internal analysis. And YieldStar chief Janine Steiner Jovanovic says 150 users now tap into RealPage’s price-setting solution. Between the two companies, that represents a combined 1.7 million units whose prices are set using RevMan software.  

A growing number of those new adopters have a different profile than what once was the norm in automated apartment pricing: they’re smaller to medium-sized operators operating in regional markets, not the nationally-focused mega-sized REITs who have been singing the praises of multifamily RevMan for years.

We had a chance to chat with the Rainmaker Group’s Bruce Barfield and Mike Beirne of the Kamson Group, a recent new adopter of RevMan, to get their take on where the apartment industry is on the adoption curve, and where it’s headed in 2011.

MultifamilyRevenue.com: It’s fair to say 2010 was a good year for revenue management in the apartment industry. What does that trend say about adoption of RevMan by the apartment industry in general? Why are we seeing this now?

Bruce Barfield, president, Rainmaker Group: I would attribute a portion of our recent growth to the unprecedented changes in the economy.  Business owners, myself included, have had to approach investment decisions with greater care than in the past several years. When faced with limited investment dollars, it is critical for business owners to have a clear picture of the return potential.  When faced with a decision to invest with the opportunity to grow revenue versus investing in new cabinets or fixtures, revenue management technologies continue to be the logical choice.

MultifamilyRevenue.com: How is revenue management changing the multifamily lease-rent price setting process? How is it changing how residents shop for apartments?

Bruce Barfield: As more and more companies adopt revenue management and as the footprint grows, the concept of frequently changing rents in response to market dynamics is becoming the norm.   The rent setting process is no longer a manual one where rents are determined at the beginning of the month and changed on an ad-hoc basis.  Making incremental changes in pricing is logical from both a revenue management and a sales perspective and allows one to differentiate true market response.

Over time, we’ve seen customers’ shopping processes evolve, as well.  Customers today are more sophisticated in their shopping methods researching in advance and narrowing down their selection criteria to speed up their decision making process.  With the transparency of pricing on line, the major Internet listing sites have real time pricing feeds incorporating lease term options. On site leasing associates are weaving that “prices can change on a daily basis” into their sales process.

MFR.com: Kamson Corp. is an owner and manager of about 15,000 units in New Jersey, Pennsylvania, New York and Connecticut that recently adopted LRO. What led you to adopt revenue management now? What are you expecting in 2011?

Mike Beirne, Kamson Corp.: We realized that traditional rental paradigms in our markets are changing, and consumer behavior is changing, too. The apartment industry is now paralleling other industries, such as airlines and hospitality; we’re starting to change the way we do business. The old ways of renting seem to be hitting a turning point.

MFR.com: For much of the past five years, large REITs were the main adopters of this technology in the apartment industry. At 15,000 units, you’re not small, but you’re also not running 50,000 apartments. What advantages do you see for smaller portfolios using this technology? At what point/unit count is it cost-prohibitive?

Mike Beirne: Well, I’m certainly not expert enough to say what’s cost prohibitive for others. But I do know if revenue management delivers on the returns we’ve seen with other adopters, in my opinion, there can’t be a point where it is ever cost prohibitive. It comes down to does the model work, and can its processes be learned?  From what we and our competitors are doing, I believe its becoming more the norm, not the exception.

MFR.com: How were you able to justify your investment across your portfolio? What type of analysis did you conduct to ensure you would get a return on your investment?

Mike Beirne: We are still evaluating that, but there’s just a gut check aspect to it. We’re already seeing that given proper guidance, our rental staffs are successful. It’s all about making those incremental gains. You only have to do the simple math to discern how the trend will play out.

MFR.com: How do you plan to support staff at the property level in terms of research and pricing info using this solution? What will they need to do to use and support the solution?

Mike Beirne: I think it’s a team effort. Our market data has to be timely, and we have to become proficient at the key indicators that LRO provides and be comfortable with them. We also have to support a cultural change with our leasing staff so they know how to “sell” based on the information LRO provides, as well as understanding the strategy you’ve built into your pricing decisions. Training is key.

MFR.com: What has impressed you most about using revenue management thus far? Where would you like to see more or better functionality?

Mike Beirne: The Rainmaker Group has been extremely timely and receptive to our questions. Everyone there is very well educated in the product they sell. That’s important to us, because at a company like Kamson, you need to have buy-in from the entire organization.

I terms of my wish list, I’d like to see a stand-alone, leasing agent boot camp for all things LRO aside from the support and training they already provide. As I said, I think training is the biggest key to success, and you have to learn any new technology to leverage it. The Stealth fighter is a great technology, but you’ve got to have highly-trained pilots to fly it. Why not do that for the apartment business, too?

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.

As one of the leading temporary and corporate housing firms in the market, Los Angeles-based Oakwood Worldwide maintains a portfolio of readily-available housing around the globe. Boasting a portfolio of 15,000 units in 4,000 locations across North America, Europe and Asia, its job is to provide short-term housing solutions – often on short-term notice – for its corporate, government and entertainment clients. Ever seen Jay Leno knock on the doors of celebs at Oakwood Toluca Hills? Yup, that’s one of their properties.

But since Oakwood doesn’t own all the units it rents out – it often leases third-party unfurnished units, furnishes them, then charges a premium on those lease terms – gauging its own supply and demand variability can be a complex task. That’s especially true since Oakwood’s supply of apartments tends to be elastic, with its demand affected by both seasonality and the general business climate. To help with that challenge, in 2009 the company brought in Jeff Young, a revenue management professional with 15 years experience ranging from auto rentals with Hertz, hospitality with Disneyland Paris and the cruise line industry with Princess Cruises. We chatted with him to get his take on the unique challenges of revenue management in this sector of the housing business.

MultifamilyRevenue.com: Thanks for taking the time to talk with us today, Jeff. Let’s start with your company, Oakwood Worldwide. What do you do?

Jeff Young, Oakwood Worldwide: Thanks for the opportunity.

Oakwood Worldwide has been in business for 50 years. While we started out as a more traditional multifamily owner, today, our main focus today is providing temporary and corporate housing solutions.

As part of that model at Oakwood, we have a number of properties which are fixed inventory buildings. These are the Oakwood buildings that are fully branded with the Oakwood name, fully staffed and fully serviced, in locations such as Southern California, Bellevue, Washington, Northern Virginia, Gaithersburg, Md. and, and Chicago.

A lot of people know about our Toluca Hills building in Los Angeles, right off the 101. That’s where Jay Leno goes around knocking on doors, asking people questions for his show.

So that’s the core of our portfolio.

Beginning in the 1990s, many of our corporate clients started asking us whether we could meet their needs in other markets, where we didn’t have dedicated Oakwood properties. We started engaging other owners and partners, to aggregate housing supply to meet that demand.

Today, along with many of our competitors, we negotiate leases for individual units and buildings throughout the country. We may take down half the apartments in a single building in New York City for six months or a year, and then remarket them as Oakwood apartments to our customers.

Of course, we also have individual and leisure travel customers that may be interested in an Oakwood apartment for a period that’s longer than a typical hotel stay, as well. But our core model is the B2B market.

MFR.com: What is the average term of your lease on the corporate side?

Young: We see an awful lot of business in the 30 to 90 day range. We also have good volume on the shorter-term side, from five days to one or two weeks.

Of course, we can also accommodate longer periods – for instance, we’re helping with the relief efforts in the Gulf right now. Many of those leases range from six months to a year.

MFR.com: You have extensive and broad experience with revenue management, having worked at the Disney Company, Hertz and Princess Cruises. How did you become a revenue manager in the multifamily space?

Young: Oakwood’sExecutive Committee is very progressive. , are very progressive. They were looking for someone to come in with significant experience to define and drive Oakwood’s pricing mission, developing the tools needed to succeed in the process.

I was contacted by a recruiter for Oakwood. My job here is to develop not only systems within the company to deploy a revenue management strategy, but to create a foundation for the processes and organization that need to be in place to do so.

MFR.com: What revenue management system are you using today?

Young: We are not on anything right now. That’s really why I’m here, to build this thing from the ground up.

We’re in the process of evaluating different options at the moment, and I hope that we’ll have made a decision in the next six months to a year. There are good solutions out there, such as LRO from the Rainmaker Group and YieldStar from RealPage.

But you’ve got to remember, ours is a more complex model than traditional multifamily. Because we have an elastic and perishable amount of supply, it’s imperative that we take into account the cost of the leases we enter into with other owners, as well as the number of leases we need to maintain in order to meet projected demand.

That’s a few more layers of complexity than what’s available in off-the-shelf solutions, so we’re still in an evaluation phase.

MFR.com: How does that added complexity affect the variables you look at, in terms of your revenue management model?

Young: The longer I work here at Oakwood, the more parallels I see with both the rental car business, in terms of managing the supply side, and the cruise line industry, in terms of the advance booking profile and buying behavior.

At Hertz, I worked on a four year project that looked at the variable revenue contribution of our fleet, and the interdependencies inherent in both supply- and demand-side decisions.

I'm a pricing guy at heart, and it's great to talk about demand forecasting, but what was interesting at Hertz was that we were able to optimize our fleet purchases, as well as our distribution decisions, in order to save a significant amount of money system-wide. Of course, if you have the right supply in the right place, you're going to be able to capitalize better on your demand opportunities. That was the whole point of what we were trying to do there.

What I didn’t anticipate, and what we learned at Hertz, was that about three times the return on investment ended up on the supply side of the equation.

So that's something I’m looking at here, which is managing our supply more effectively.

MFR.com: What similarities do you see with the cruise industry?

Young: At Oakwood, we have negotiated business with our corporate customers, but we also have a volume or block business that’s more akin to the group model in hotels, and especially, the cruise line industry.

And if you think about it, a multifamily leasing decision is not unlike a cruise purchase decision. They’re both big decisions, in terms of money. If you’re making a decision on where you’ll live for the next three to six months, that’s not dissimilar to a $20,000 decision to take your family on a cruise across the Pacific this summer.

At Oakwood, how we set up that block business, and then the type of inventory risk we take to satisfy that block demand, I think there is a close parallel there.

MFR.com: Where is your business coming from at Oakwood? Who is the "travel agent,” so to speak, that’s helping you fill your apartments?

Young: Today, we have an experienced sales force out there talking with our major accounts, such as the U.S. Department of State, or Microsoft, which is a recent win for us.

But for example, our top 100 accounts in New York City only comprise two-thirds of our total business there. So overall, you have a highly fragmented business. That fragmentation, of course, makes the supply side and pricing in general that much more complex.

At Oakwood we’re working to standardize our negotiated pricing process, and our block or group pricing model. Right now, it's still very much the Wild West out there.

We might only know about a given demand two weeks before we need to fulfill it, and if we don’t already have enough supply in that market, we have to take down additional units to meet those needs.

Keep in mind, our landlords, many of whom are using lease rent optimizers, or similar tools, are not foolish, either. They're not just out there giving us the space for free.

We may have to take it then, or in many cases, we may have already negotiated pricing with them, on the supply side, six months to a year ago. Now, in some cases that may be a good thing, but given the recent environment, you can also get stuck with a lease that’s more expensive than current market rates.

So it’s all very complex, and each factor impacts the overall model, which directly impacts our margins.

MFR.com: That’s a lot of moving parts.

Young: It is, which is why we're so committed to tightening up the pricing model. We’re very focused on hedging against those kinds of risks. In doing so, you win some, and you lose some, and hopefully you come out better on the other end.

Check back for Part 2 of our Interview with Oakwood’s Jeff Young soon.

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.

“We believe it is most efficient to find local management with local expertise, and we don’t expect a single fee manager to understand every market either,” says Kyle Ellis, one of the managing partners of Abacus. “We’re perfectly comfortable working with several ‘best-in-class’ management firms across our portfolio.”

The first major issue is when multiple fee managers are used they all use different data and their own internal metrics and strategies.

The second problem with using multiple fee managers is inconsistent reporting. “When there are different types of reports coming in, on different schedules, it can be quite difficult to keep up with what’s really going on out there,” Ellis says.   “What you want is a single, consistent, and methodical approach to pricing and an accurate and timely reporting solution that’s used by all managers.”

Abacus adopted a standardized pricing strategy by deploying RealPage’s Yieldstar revenue managemnent system to help eliminate many of the inconsistencies they were experiencing.

Revenue management systems for multifamily generate pricing based on several factors, including current and expected vacancies, projected demand, recent rental rates, amenities, lease term, move-in date and existing market dynamics. Optimized pricing can be achieved daily, which in turn will help operators generate more income and improved financial results.

Read more about the Abacus case and other Yieldstar case studies on optimized pricing here:

Multiple Fee Managers, One Revenue Management Solution

Rent price volatility is considered a negative by those seeking predictable price forecasts and budgets. We worry that frequent price changes may cause renters to push back or try to game the system.

On the flip side, revenue management maximizes total yield. Total return is more important than achieving the highest rent rate or price and budget stability. Additionally, anecdotal experience shows that consumers understand receiving different offers once the RM methodology is explained.

Below is a cogent, clear explanation of how Camden Property Trust expects its Yieldstar pricing system to work for Camden. In it, Camden President Keith Oden addresses the price volatility they expect, and why they consider it desirable.

Excerpt from Camden Property Trust Q3 2007 Earnings Call Transcript:

November 02, 2007

(Formatting added, and minor clarification edits have been made to clean up typos)

Keith Oden, President, Camden Property Trust

The Yieldstar system attempts to provide the best possible fit between underlying market conditions and the market-clearing price for our rental inventory at any point in time. In order to accomplish this, it is very much a forward-looking system, and at any time, any given time is attempting to anticipate market conditions five to six months out and make minor mid-course adjustments well in advance of forecast horizons, attempting to avoid price volatility in the future.

In a purely theoretical sense, the results we would expect to see from this tool applied to our communities are as follows:

• As markets begin to recover, and pricing power improves, the forward-looking nature of the pricing engine would raise rents sooner than our competitors.

• At some point out in the future, as evidenced of the market improvement as apparent, the competition will respond and raise rents as well. When market conditions begin to deteriorate, the reverse will happen. Our forward-looking model will begin moderating rent increases prior to our competitors.

Interestingly, the facts seem to support the theory. Beginning in the third quarter of 2005 Camden’s revenue growth was at the top of the sector and this continued through the first quarter of 2007. In fact from the first quarter of ’05 through the second quarter of 2007, Camden’s cumulative revenue increase was second highest of all publicly reporting multi-family companies. So we achieved larger rental increases and we got them sooner than our competitors

Beginning in the third quarter of this year our revenue slowed relative to our peers, which is consistent with a revenue management tool that is attempting to get ahead of the curve of a slowing market. So, it will be interesting to see what happens in the next two quarters regarding the revenue growth rate of us, and our competitors.