No matter what the industry, companies are constantly trying to gauge their performance and how they measure up to their peers. Benchmarking data allows firms to do so, and helps them identify areas for improvement as well as evaluate their progress over a period of time. The hotel industry accomplishes this through measuring RevPAR (revenue per available room), which companies report through a data exchange facilitated by Smith Travel Research. STR has collected this data since the late 1980s to produce its Smith Travel Accommodations Report (STAR), the Holy Grail for hotel companies looking to find historical performance information all in one place.
Based on the success of the hotel industry, many multifamily leaders have wondered if the same type of universal metric could be developed for the apartment sector. While this question has been discussed for years, the industry has encountered some stumbling blocks along the way. However, the issue is back in the spotlight, thanks to the 2015 Spring NMHC Board of Directors Meeting, where several industry leaders expressed concern over the lack of a standard means to benchmark performance through data sharing. NMHC Vice President of Industry Technology Initiatives Rick Haughey spoke to MHN about new developments surrounding the issue and the multiple ways a standard benchmark could benefit the multifamily industry.
When did this issue come to light and what progress has been made since the 2015 NMHC meeting?
This has been an ongoing issue we’ve heard about from the industry for probably over a decade. They’ve viewed what the hotel industry has as something that would be ideal for the apartment industry. But for a number of reasons, we haven’t had that. The STAR report provides one metric that the industry can use as a simple benchmarking indicator to monitor performance and for investments in properties.
We had an initiative in the early 2000s to look into this. The plan was for NMHC to be this third party that would facilitate the data exchange.
Around 2005, we determined that wasn’t workable for the organization, so the initiative was put on ice. We’re back looking at it again now—this started in 2015 with a much smaller charge. We formed the NMHC Industry Performance Benchmarking Task Force, with as much diversity as we could: large, small and medium companies that are publicly owned or privately held. We had one conference call already and we’ll also have an in-person meeting at the 2016 Spring Meeting, which is from May 18-20, so hopefully we’ll have something finalized by then. (Editor’s Note: At the time of publication, this meeting had not yet occurred.) Ultimately, we would like to cover this at our 2016 NMHC OPTECH Conference in November.
What are the main goals the task force hopes to accomplish?
Their charge is really twofold: to come up with the calculation they think would work for this industry and then tell us how to define the terms in the calculation. If they decide on something similar to RevPAR, does revenue mean just rent revenue divided by the number of units, or do we mean rent and ancillary income (all revenue created on site)? At that point, the industry would go back out and try to determine how to facilitate the data exchange. It could be a private-sector solution, a nonprofit or a third party that steps in.
How is the multifamily industry measuring performance today and what issues do the current methods present?
Part of it is what will be the next step, which is the data sharing. There are transparency issues with companies getting comfortable sharing their data, and that has been a significant stumbling block. I think the hotel industry was fortunate in that it began data sharing back in the 1980s, and STR has been facilitating that data exchange for 30 years. We haven’t had the benefit of that; we’ve had a much more fragmented approach. So that’s going to be one of the challenges moving forward.
Right now, there’s a host of ways to benchmark properties. It could be mystery shopping (asking what your competitors’ rents are), but we see issues with that because you’re getting asking rents and not taking into account the actual rent received or if there were concessions, like a free month’s rent. Plus, it’s more time consuming than figuring out a way to share data and have one simple calculation that’s consistent across the industry.
Some companies use property management software (PMS) for benchmarking, but different companies use different PMS, which gets into the second and more difficult phase of this: How do you facilitate that data exchange? NMHC will not be the entity that facilitates that data exchange, so that’s a discussion that will have to take place after the task force completes its work. We would expect the industry to say, “This is the benchmark we’ve come up with, here’s how it’s defined and we would like some way of creating the data exchange.” It’s to be determined how that would work, but we hope the industry would take the benchmark and push for some solution to allow data sharing.
What challenges are there with determining a universal metric for the multifamily industry?
There could be legal issues surrounding it. Once the task force accomplishes its goals, we’re going to send out their proposal for legal review to determine if there could be any sort of antitrust, anti-collusion or price-fixing issues. If there are legal issues, we’d have to go back to the task force for further discussion. My thought is, they’ll be looking to determine if the pro-competitive benefits of having this benchmark outweigh any potentially anti-competitive issues that might arise.
Another major issue is how to come up with the calculation. The hotel industry uses RevPAR, which is basically just the revenue from the room itself—and doesn’t include room service or anything else—divided by the number of available rooms in the hotel. If you apply that to our industry, one of the first things that jumps out is we have studios, one bedrooms, two bedrooms, etc., while hotel rooms are basically studios. So how do you account for unit mix?
Also, they have to think about breaking out by apartment types. Luxury would probably be addressed through using comparable sets of properties. But with affordable housing, there can be artificial constraints on rent, so you have to figure out if this metric applies to affordable. They just waded into this discussion on the last call.
What benefits do you think a standard benchmark would provide for the industry?
We see a benchmark as an effective and consistent way to measure not only performance but also value—we believe it will create consistency, transparency and certainty relating to property performance and property value.
It will also lead to better property management, investment decisions and improved access to capital. Outside analysts will have a consistent way to look at properties and see how they’re doing, potentially making it easier for our industry to access capital.
Would the task force also determine what the metric would be called and who’d facilitate the data sharing?
We had one call that was basically an overview of what the hotel industry has done, and I think we need to hear from the industry to determine that. I think they would go toward trying to keep it simple, which is sort of the beauty of the hotel metric—that it’s just room rate. We’re hoping to have this completed by the Spring Meeting, but it’s highly possible that we would continue on with some of those conversations afterwards. The devil’s in the details, and there’s still a lot of details that need to be worked out. It should be an interesting discussion moving forward, and hopefully we’ll get there.
The way we view it is we can at least get this part done. Hopefully the industry will be able to figure out the data-sharing piece that will allow it to reach the goals of consistency, transparency and certainty.