An essential pricing tool in the hotel, airline and rental car industries for years, revenue management software has yet to gain widespread acceptance in the apartment sector. Fewer than 10% of apartment owners and operators in the United States have adopted the technology. But apartment professionals predict that in three to five years the software will become an industry staple in order to boost the bottom line and maximize pricing efficiency.
Seven years ago, Archstone, one of the country's biggest players in the apartment sector, became the first owner or operator to introduce revenue management software. Then Camden Property Trust and other big competitors followed in Archstone's high-tech footsteps.
Archstone, Camden and their brethren have trumpeted the benefits of revenue management, claiming an estimated 1% to 4% bump in revenue. It usually occurs within days of installation and continues indefinitely, with increased precision in the rent-setting process. More owners and operators have overcome their skepticism about the return on investment versus the price of admission.
Like an apartment in need of new carpet, fresh paint and updated appliances, the pricing model throughout the multihousing industry is undergoing an extensive makeover. Apartment REITs, particularly the publicly traded ones, have led the way in revenue management primarily because they're under intense financial scrutiny from investors and Wall Street analysts, says Donald Davidoff, group vice president of strategic systems at Englewood, Colo.-based Archstone.
In an industry that's slow to implement any type of technology, the last converts to revenue management software likely will be small, cost-conscious owners and operators who dominate the industry. For the owner or operator of a 500-unit portfolio, the annual tab would range between $9,000 and $18,000, according to industry estimates.
“There are still a bunch of people sitting on the sidelines, waiting to jump in,” says David Woodward, CEO of The Laramar Group, which owns or manages about 20,000 apartment units. Laramar, with dual headquarters in Chicago and Greenwood Village, Colo., uses revenue management software from The Rainmaker Group Inc., one of the two key suppliers of the technology to the apartment sector. The other is RealPage Inc.
Once they jump in, owners and operators realize the benefits of revenue management, say users. The benefits include more consistency and accuracy in pricing, less subjectivity in setting rental rates, more flexibility in lease terms, and fewer concessions, like one month's free rent.
Furthermore, apartment owners and operators that use revenue management can react more quickly to ever-shifting market conditions than they could in the past. In a business where expenses already are tightly controlled, unearthing new ways to mine more revenue is crucial.
Revenue management technology accomplishes more than apartment managers or leasing agents possibly could with calculators, spreadsheets, market surveys, educated guesses and other methods they've traditionally used, experts say.
“Anything that reduces how far rents and occupancies go down in bad times and increases how well they go up in good times is vital,” says Davidoff of Archstone, a Rainmaker customer.
A revenue management system crunches various data to determine rents based on supply and demand. The information is updated regularly, often daily or weekly. Depending on what type of software a company installs, that data may include leasing patterns, upcoming lease expirations, competitors' rents, and walk-in and Web traffic from prospective tenants.
RealPage's software pairs lease transaction information entered into a property management system by property personnel with market data collected by RealPage's M/PF research unit. Rainmaker's software analyzes more than 200 pieces of data each day. Most of the information comes from a client's property management system.
Revenue management software “has revolutionized our industry,” says Kristy Simonette, CIO at Houston-based Camden, whose portfolio comprises more than 180 properties with nearly 63,000 units. Camden is a RealPage customer.
That revolutionary invention can pay huge dividends. Take, for example, a portfolio that generates annual net operating income (NOI) of $100 million, with a value of $2 billion at a 5% cap rate. If the NOI rises by 3%, it would bolster the value of the portfolio by $60 million using the same 5% cap rate. “I can't think of anything else in our industry that can bring an incremental value creation like that,” Davidoff says.
Despite the value of revenue management, smaller owners and operators have balked at installing the software. Experts say they tend to be more set in their ways than the bigger players and less willing to shoulder the additional costs and responsibilities associated with installing the software.
Typically, revenue management software costs about $1.50 to $3 per unit each month. For a 400-unit apartment complex, that amounts to about $7,000 to $14,000 a year. However, industry executives point out that the revenue bump from employing the software — roughly 1% to 4% — far outweighs the expense.
The smaller players in the industry represent “the last frontier” for revenue management, says David Cardwell, vice president of capital markets and technology at the National Multi Housing Council (NMHC), a Washington, D.C.-based trade group. About three-fourths of U.S. apartment properties contain fewer than 200 units, according to NMHC, and individuals or partnerships own about two-thirds of apartment properties.
But in order for those small players to keep up with their bigger rivals, they'll need to embrace this technology. Experts say third-party managers, which run thousands of small apartment complexes for individuals and partnerships, will wind up bearing some of that burden. “The basic theory behind revenue management is, don't leave money on the table,” Cardwell says.
Quick return on investment
Mid-America Apartment Communities Inc. is adhering to that theory. Simon Wadsworth, executive vice president and chief financial officer, says the Memphis, Tenn.-based company saw a revenue lift of 1.5% to 2.5%, translating into $6 million to $10 million, after installing software from Rainmaker.
Yet the revenue management system costs less than $1.5 million a year for Mid-America's nearly 42,000-unit portfolio. In Mid-America's case, it witnessed an almost immediate boost in revenue from new and existing leases. Software executives say the boost can be sustained amid good or bad market conditions.
Tammy Farley, principal and executive vice president of Rainmaker in Alpharetta, Ga., says this technology is a “no-brainer.” Rainmaker's revenue management product for the apartment industry is Lease Revenue Optimizer.
Users achieve a return on investment (ROI) from the Lease Revenue Optimizer within seven to nine months of a full rollout, Farley says. Rainmaker's chief competitor, RealPage, pegs its customers' ROI at three months. According to Rainmaker and RealPage, clients enjoy not just a one-time revenue boost but sustainable revenue growth, although perhaps not as high as the initial lift.
Erik Alexander, senior vice president of Palo Alto, Calif.-based apartment owner and manager Essex Property Trust, says that revenue management software is “inexpensive insurance to get quality pricing recommendations that we still have control over and that enhance our revenue.” Essex, with more than 130 properties, uses revenue management software from RealPage.
Revenue management system recommendations are “statistically and economically sound,” says Janine Steiner Jovanovic, president of the M/PF YieldStar division at Carrollton, Texas-based RealPage. Her division's product for revenue management in multifamily is called Price Optimizer. Without the technology, some apartment owners and managers make rent decisions based too heavily on competitors' rates.
“If you are trying to match yourself constantly to the person next door — who might, by the way, have a terrible leasing staff — you're not necessarily putting yourself in the best possible position,” Jovanovic says.
Jeff Adler, vice president of Denver-based Apartment Investment and Management Co. (AIMCO), agrees. AIMCO owns and operates more than 1,100 properties and nearly 189,000 units. The company uses its own proprietary system for revenue management.
“Prices do move more quickly now. That does place an added responsibility on the team to be able to understand and explain the volatility of pricing,” Adler says. “The technology is only a small part of what it takes to implement a revenue management process.”
San Diego-based ConAm Group of Cos. is realizing that technology is a small part of the equation. The company, which oversees a portfolio of more than 45,000 third-party-managed and company-owned apartments, is gearing up to test Rainmaker's Lease Revenue Optimizer product at a small number of properties.
“Culturally it will take some time for our associates to rely on, and feel comfortable with, having a system generate the rents versus the manual process we do now at the site level,” says Art Dramby, director of systems strategy at ConAm. That manual process involves gathering the same sort of information found in a software-driven setup, but without the data-collecting frequency, accuracy and efficiency afforded by revenue management technology.
One big change is that the technology removes emotion from rent-setting. Some apartment managers tend to give price breaks to longtime tenants at lease-renewal time. With the software in place, a reliable tenant in good standing might pay a rental hike of $50 a month instead of an artificially low increase of $25. Letting the technology set rents allows the staff to devote more time to customer service and marketing.
Alexander of Essex points out that the software also gives executives confidence to bump up prices more than in the past. During Essex's recent software testing, the revenue management system triggered a proposed monthly rate of about $1,600 for a studio apartment being vacated at the Bunker Hill Towers in downtown Los Angeles. Executives at Essex were surprised, since a similar unit had been fetching about $1,300 a month.
The software determined that none of the 34 other studios were available, and few of the studio leases were scheduled to expire over the following 90 days. Essex ended up renting the studio for more than $1,500, gaining a monthly premium of more than $200. Before buying RealPage's product, Essex wouldn't have taken such an aggressive pricing stance.
Another way that users of revenue management technology are reaping higher rents is by relaxing their leasing terms. Standard lease lengths are six, nine or 12 months. With this software, apartment owners and managers find they can extract higher rents for shorter leases, perhaps two or three months.
On the other end of the spectrum, some users of the software are considering lease terms up to 18 months to shore up occupancy and keep cash flow steady.
For some apartment owners and managers, concessions now are nearly nonexistent, since those deals usually reflect artificially bumped-up rents. With revenue management, if someone wants to rent a unit that's available for five months with a move-in date two weeks away, the price may be $800 a month. But the system can quickly calculate that the same empty unit may fetch $750 if the prospect is willing to move in right away.
In the second quarter, leasing concessions dropped 53% at Mid-America over the same period a year ago as a result of the new revenue management system.
“The vast majority of our clients have discontinued the use of concessions and have experienced only positive results. My clients tell me that apartment prospects believe concessions are a ruse,” RealPage's Jovanovic says. “You don't have to use concessions to make people feel like they are getting a bargain.”
While technology does most of the work, the human touch remains important, says Rainmaker's Farley. “We don't believe that [revenue management software] is something that you should turn on, then let it magically do its work as a magic box and spit out prices.”
John Egan is an Austin-based writer.
SOFTWARE SERVES AS REVENUE ENHANCER
Apartment executives tout a bump in revenue as one of the benefits of revenue management software. Here are the revenue gains reported by seven users of this technology.
|Company||Revenue Increase||Software Vendor|
|AIMCO||1% to 2%||AIMCO|
|Archstone||3%||The Rainmaker Group|
|Camden Property Trust||1% to 2%||RealPage Inc.|
|Essex Property Trust||2% to 4%||RealPage Inc.|
|The Laramar Group||3%||The Rainmaker Group|
|Mid-America Apartment Communities||1.5% to 2.5%||The Rainmaker Group|
|UDR Inc.||1% to 2%||RealPage Inc.|
|Sources: Company executives|