Planning for a Sunny Forecast

How revenue management forewarned users of the economic collapse

Forecasting a company’s revenue is perhaps never more difficult than when the economy is so uncertain. With the majority of an apartment community’s income relying on rent, the key for multifamily owners and operators is determining the maximum they can charge residents. This task becomes much less straightforward when macroeconomic conditions come into play. A revenue management solution can help properly evaluate a community’s market worth, taking into account such external factors as submarket fundamentals.

The rent vs. occupancy dilemma

“Revenue management is the discipline of optimizing income from some fixed inventory—the marriage of supply and demand,” explains Tammy Farley, principal at The Rainmaker Group, a software company that provides the LRO profit optimization solution for multifamily operators. “It’s getting the right product to the right customer at the right time for the right price and setting prices based on market conditions. So revenue management becomes a disciplined scientific pricing based on fact.”

The so-called magic question, adds Janine Steiner, president of YieldStar, RealPage’s asset optimization tool, is how to budget for rent growth. That is, do you look to maximize rent or occupancy? “The way that we recommend doing it is having a good understanding of where your property has been in terms of rent and occupancy, understanding the submarket and projecting the quality of what you have available.”

Farley warns against considering only one or the other when attempting to forecast revenue, though. “It’s really dangerous because you operate in a vacuum,” she notes. “We are constantly looking at both and trying to maximize the optimal level.” But for most management companies, such as Seattle-based Weidner, the focus lies on net effective rent.

“We really want to deliver the best possible price by balancing supply and demand with revenue management,” says Jack O’Connor, chief financial officer of Weidner, which owns and manages approximately 21,000 units, most of which are Class B assets in tertiary markets. “We look at occupancy; we look at concessions. We look at the overall rent structure with the goal of getting the most money in the bank per unit. We tend to lead in pricing; our competitors tend to follow us,” O’Connor adds.

Because of its consideration of revenue management, Weidner saw hints of the economic collapse before it actually occurred—and prepared accordingly. “Rent growth was slowing so we started preparing for that by reducing expenses,” O’Connor recalls. Consequently, “we looked at the way our loans were structured and made sure our leverage was consistent with a down market and that we had cash flow to run operations during good times. We were able to sustain ourselves because we prepared well for it by having a good portfolio, controlling expenses and getting the best net effective rent.”

With the concept of achieving best net effective rent, however, comes the question of whether or not to offer concessions. Farley argues against them.

“In a true optimized world, you would move away from concessions and just publish a lease price that reflects those things factored in,” she notes. “We have found that [revenue management] customers usually move to concession-free pricing, but in this economy, there is that perception to give something away.” Despite this view, however, Farley points out that for every free month, apartments lose 8.3 percent of their revenue on an annual basis.

Forecasting—and reforecasting

Despite his company’s success, O’Connor notes, “It is much more difficult to forecast in today’s recessionary environment than it has been in the last four to five years. We don’t know when the proverbial trough is going to occur and we’ll hit bottom.”

Because of this, Keith Dunkin, director of business management at YieldStar, observes that many companies are delaying stating their expectations to see how conditions materialize throughout the rest of the quarter. Instead, he predicts they will tend to reforecast continuously through 2010. “As actuals come in, you will see some restatements of expectations.”

He adds, “frequently, we see that the clients that end up with the best overall performance at the end of the horizon reevaluate early and frequently and are willing to make modifications early on. A lot of what you’ll see in budgeting for 2010 that may or may not bear itself out is early terms and evictions that have plagued a lot of markets at the low end of the asset pool. That’s almost pretty consistent across all markets.”

However, clients of revenue management systems continuously have access to market condition information, which not only allows them to have a leg up on the competition but also can provide them with a heads up on how the economy is performing. Thus, like Weidner, many of those companies using such systems were able to predict what would happen in the economy before the banks collapsed and were able to plan accordingly. O’Connor notes that his company’s use of revenue management allowed it to “see signs of the general economy slipping.” And, what’s more, in the past year, Weidner has added 1,500 units to its portfolio throughout the United States and Canada.

“Those using [revenue management] knew there was a disciplined method of pricing so they didn’t panic. Those that weren’t using it, did,” Farley observes. “We like to think that revenue management lifts all boats in a rising tide and makes all boats a little bit smarter.”

Both LRO and RealPage, for example, constantly evaluate market conditions—using such tools as Axiometrics—and determine pricing every night. “Because of that, our customers saw what was coming long before it was here because they could see availability start to pick up. They had more units available than they typically would in a season,” explains Farley. “They saw something was changing. So they saw that they should be more aggressive in retention and more temperate with levels of rent increases.”

YieldStar is currently developing a forecasting tool scheduled to be available in 2010. “What we are doing with that is blending internal fundamentals and overlaying them with the macroeconomics of job growth of the submarket in terms of supply trends,” explains Dunkin.

The solution will “look at whatever historical data we have available for a particular property, and based on what has happened on that property and in that market using MPF [Research]’s (RealPage’s market analysis tool) market data, we’ll get a good understanding of where their rent and occupancies have been and how it’s trended in their neighborhood,” says Steiner. “And in terms of projecting forward, we’ll use some of the same modeling techniques; we’ll just do it on a shorter horizon.”

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