Revenue Management

How to maximize the value of apartment assets.

In the apartment industry, one task confronted by nearly every company is maximizing the value of assets, given the constraints that often cannot be controlled. Revenue management processes have shown the value of extra demand and that it is worthwhile to capture such increased demand.

“The point isn’t just passive calculation; it’s showing new demand frontiers and what it takes to get to a new level of revealed demand,” says Lefkovits, president of Joshua Tree Conference Group, the co-producer of the Apartment Revenue Management Conference.

Revenue management provides a consistent method and optimization algorithm enabling inputs like unit-type demand, market conditions and units being offered to consistently optimize revenue at the property level.

Revenue management systems use historical patterns and current data to arrive at the best pricing for today’s situation, according to Lefkovits.

“That maximizes the revenue on the asset,” he says. “The advantages that make it worthwhile include increased revenues, greater transparency, faster market response and certainty you’re making consistent decisions that are based on data, not emotion. It‘s like cloning the most consistent, experienced pricing executive and arming him or her with a maximization algorithm. It‘s a big win, and few companies have shut it off, once rolled out portfolio-wide.”

But all is not perfect. Revenue management practices are like any new process, Lefkovits says. “The drawback is managing the unfamiliar new process that gets overlaid on top of an existing team of people,” he notes.

Janine Steiner Jovanovic, president of Carrollton, Tex.-based YieldStar and MPF Research, agrees. “Sometimes the owners are ready, but the people who work for them are not. You’re dealing with different levels of comfort around the concept of revenue management. The typical roadblocks you face are just normal resistance to change. They’ve been successful for years doing things [the traditional] way. Pricing is so much a part of people’s pride. We help them understand this is a complement to the way they do things. It’s not a replacement for all their experience, knowledge and talent around pricing.”

While revenue management is being adopted more heavily these days, its penetration in the industry is still only about 20 percent, Jovanovic reports. That means it’s a competitive differentiator for those using it.

“But it’s a big change to those who are just now adopting it,” she says.
“The change management element can’t be underestimated.”

Calculating every option

In traditional pricing models, it hasn’t been possible to calculate the effect of every move-in and lease term variable, and their impact on the bottom line.

“Someone walks in and says, ‘I want to move in in 30 days,’ when that unit is available today,” Jovanovic says. “And he says he wants a seven-month lease until the winter, and I can’t lease then. Traditional pricing is very restrictive. But with revenue management we’re able to build in that cost of vacancy for 30 days, and we also build into that lease the difficulty of leasing in the winter. A human being can’t take into account all variables, but a system like this can calculate all the variables, and does so every single day, calculating every possible option for all units.”

Revenue management results in flexibility for associates at the property level, says Andrew Rains, executive managing director of the multifamily business unit at Rainmaker LRO in Alpharetta, Ga. Tools like LRO give “more flexibility in [associates’] ability to say ’yes’ to the prospects,” he says. “Because the prices change on a daily basis, it creates a gentle sense of urgency during their conversations with prospects to get the deal done sooner rather than later.”

Lee Montgomery, Denver-based vice president of revenue management and industry principal at Santa Barbara, Calif.-based Yardi Systems, whose revenue management product is RENTmaximizer, echoes that assessment.

“The property-level operations team feels they now have more variables to present, and it takes friction out of the process at the point of sale,” he says. “It gives them multiple price points to present to prospects … [giving prospects] flexibility in pricing and unit, depending on move-in and move-out dates.”

Beyond the upsides of higher rent growth and greater flexibility, revenue management also improves operational processes, Montgomery says.

“It consolidates all your revenue information in one place, for review by the appropriate personnel, as opposed to being all over the place. And opposed to being opinion-based, it’s now data-driven to allow for data-driven decisions.”

What’s ahead for
revenue management?

Experts in revenue management hold an array of views about what the future holds. Rains is among many who believe revenue management will increasingly be used in mobile applications to allow property-level employees to pull up timely pricing information right on their mobile phones and tablets.

He also foresees online communities and social media driving the development of large data warehouses, whose market data property managers will be able to use to better meet consumers’ needs and wants.

“There will also be the ability of property management companies to benchmark their performance in real time against their competitors,” Rains says.

Lefkovits expects revenue management users and consultants to begin examining a number of fresh initiatives during the coming years.

For instance, he expects users to look for arbitrage opportunities in renting apartments for different purposes. “If the rents for single-occupancy offices in the area are twice the rents for studios, we’ll see owners renting those units to solo practice lawyers, consultants and financial planners who can’t work from home and don’t want to go into the center city,” he predicts.
He also expects to see revenue management used to “identify smaller properties whose rents are low relative to market in order to find opportunities to buy, re-tenant and flip smaller properties,” he says.

“A REIT may not want to own a 30-unit building, but it could re-position and sell one for decent fee income if there’s nothing else going on.”

Based on the last two industry technology conferences he’s attended, Yardi’s Montgomery foresees property management companies using revenue management processes to gain data on other parts of their operations.

“Delivering that data in a digestible format to property management and making it real, alive and timely is an exciting next step,” he comments. “It will become not just a pricing tool, but also an informational tool to help drive the other aspects of the business and leverage other data sets.