A Conversation With Eric Griffin of Pearlmark Real Estate Partners-Part 2
In 2008, Pearlmark, a principal-oriented, private equity real estate investment firm based in Chicago, embarked upon its journey to leverage revenue management. After experimenting with the two primary providers in the rental housing industry, Pearlmark now uses YieldStar exclusively.
Revenue management has become a core part of how Pearlmark handles pricing and performance analysis. In part two of my interview, Eric Griffin, vice president of multifamily asset management, continues to share his thoughts with me about revenue management with YieldStar.
Janine Steiner Jovanovic (JSJ): How does YieldStar influence your transaction strategy?
Eric Griffin (EG): We are in the business of buying, operating, and selling assets with a goal of providing a healthy return to our investors. We’re highly focused on rental income when buying, operating, and selling those assets. When we look at rental income we focus on two things, overall occupancy and net rent per occupied unit. We calculate net rent per occupied unit from the financial statements as follows:
Rental income / (total units * (1 + vacancy loss / gross potential rent))
This is the primary driver of our underwriting and valuation models. We calculate it historically, see where it peaked, where it bottomed, and where it is now relative to current net asking rents. The gap between in-place net rent per occupied unit and recent leases provides some indication of future rent growth. If we can pick up a property that’s been using a lot of up front concessions and we move the asset to net effective pricing, i.e. YieldStar pricing, we will see rent growth greatly outperform the market in the next couple years.
On the sell side of transactions we will be very aggressive on renewal increases before switching to more of a renewal retention focus about six months prior to marketing. YieldStar makes this strategy change easy by simply adjusting some parameter settings. It also provides compliance reporting that gives us comfort that the strategy is being executed.
JSJ: What’s so bad about a concession Eric? Just kidding! Can you describe some more how YieldStar impacts your rents?
EG: Concessions create a lot of volatility. So moving to net effective rent helps stabilize our rent roll. Also, YieldStar helps take out a lot of the emotion in negotiating leases, especially on renewals. It’s hard to ask a resident for a $200 rent increase. It may seem crazy to a leasing associate to ask a resident to pay $200 more than they were paying before, but it’s also crazy for us to allow residents to continue paying $200 less than market. The process with YieldStar just makes the renewal conversation easier for the leasing team.
JSJ: You’ve told me before that you’ve benefited from reporting in YieldStar almost as much as the pricing. Why is that?
EG: YieldStar provides you with so many ways of looking at performance… how you relate to your goals and the market…where you are relative to where you were. The property management systems don’t tell you what you need. YieldStar lets you know where you’ve been, where you’ve peaked, where there’s softening, where you’re headed, and how you sit in the market relative to the competition. That knowledge has helped us understand where we stand and which levers to pull in order to improve results. There’s tremendous data right there in YieldStar that is easy to access and use, and it will lead you to the answer. You don’t have to compile and manipulate data, because it’s all done for you in YieldStar.
JSJ: Thanks Eric. Any parting words for our readers?
EG: Revenue management systems are tools that help you find the optimal rent and occupancy balance. These systems have to be monitored regularly; you can’t just turn them on and let them go. I see the daily rate acceptance correspondence between property managers, regional managers, and pricing advisors. I provide my own commentary from time to time when needed. I participate in all of the pricing and performance calls. We regularly review and adjust parameter settings to adapt to ever-changing market influences. The entire process is very efficient and highly structured. If you want to maximize your opportunity for revenue growth, use a revenue management system. YieldStar has become our preferred system for a number of reasons.
Pearlmark is a principal-oriented, private equity real estate investment firm that pursues domestic, value-added investment strategies through a series of institutional equity fund vehicles. Since its inception in 1996, the firm has made approximately 470 office, industrial, retail, multifamily, and mezzanine loan investments nationwide representing a gross investment of over $11 billion. The current equity portfolio includes 41 office buildings, seven retail properties and two industrial assets totaling over 23.4 million square feet, as well as 15 multifamily assets with approximately 4,100 units. Pearlmark and its partners, including insurance companies, public and private pension funds, foundations and endowments, banks, corporations, and high net worth individuals and families, have committed nearly $4 billion of equity capital to the firm’s investment activities. The company currently employs 60 professionals and is based in Chicago with offices in Denver, Los Angeles, and New York City.