Growing the Pie on Revenue Management
Revenue management helps property managers find the right balance in rents
Whether a community is leasing up for the first time, undergoing a makeover or just riding the ebb and flow of market cycles, apartment owners and operators must find the right balance in rent prices so their properties perform at maximum efficiency.
However, equalizing supply and demand during any economic climate can be a challenge. Unless property management has the right tools.
Revenue management and yield optimization platforms are helping the multifamily housing industry navigate the many conditions and factors that affect rent pricing to find that sweet spot, says YieldStar President Keith Dunkin.
“Revenue management is about supply and demand and elasticity, making sure you have the right price for residents associated with your asset strategy. The power is in utilizing statistical optimization, as opposed to rules based or spreadsheet systems. Our partners have outperformed for over a decade largely because of the power of the math and data driving our solution, he recently told attendees at the Marcus & Millichap multifamily conference in Dallas.
Lease-ups, renovations benefit through revenue management
Ten years ago, revenue management largely was confined to use in the real estate investment trust and institutional investment circles. Today, the concept is leveraged across 90-95 percent of the National Multifamily Housing Council’s top 50 owners and operators, Dunkin says.
YieldStar is a product of RealPage who supports 11 million units across the globe, most of them in the U.S. The product, Dunkin says, helps strengthen rates because the software bends and doesn’t break, especially when market conditions soften.
At a time when many new properties are coming on line, revenue management can be a helping hand during lease-ups because the software paints a picture of the market in real time. The software surveys real-time lease transactions for a given area so owners and operators can see how the market stacks up with their expectations. That, says Dunkin, allows properties to can gain better control of the cycle and roll out with competitive apartment pricing.
“For Lease Up, it’s all about understanding the timing of the market and gross absorption patterns relative to your unit deliveries and Pro Forma expectations, and really getting better control through that lease-up cycle,” he said. “At the end of the day, you’re either trying to get enough cash flow to cover debt service or you’re further upping your position for the disposition and trying to juice the last remaining component of the rent roll.”
Also, revenue management is being leveraged for renovations, which are a big player in today’s markets. Dunkin says the software can better execute control of rehab projects though real time evaluation of supply and demand and analytics that put pricing thresholds and floors in place as needed so that the market and model dictate the renovation’s value.
“For our partners, the renovation value that the market will bear is not always line with expectations, sometimes the market will accept higher rates than anticipated and sometimes there is less opportunity than anticipated” he said. “Knowing that as you go through that renovation has produced better results for our clients.
Yield optimization identifies opportunities in up, down markets
As markets soften or strengthen, yield optimization becomes an important tool, Dunkin says.
Historically, the apartment industry has been challenged in declining markets when comps and concessions sometimes get overused. Ultimately, a property can leave too much money on the table by taking rents down farther than necessary by making reactionary adjustments based on what competitors charge for similar asset types.
“Where yield optimization is really productive for that is to look internally at supply and demand for unit-type by unit-type every single day so you can fully understand the effect of a downturn,” Dunkin said. “You can start to manage that based on what’s really happening at your asset as opposed to potentially overreacting.”
Dunkin said Pinnacle’s portfolio actually experienced a 4 percent revenue outperformance when the market retracted after letting revenue management be a guide. He also said the tool proved its worth in 2008-09 by backing off rents early in the downward cycle.
When the dust settled, the discounts were not nearly as significant as those who waited, Dunkin said, because the tools were able to identify market conditions and internal supply and demand to make adjustments before the big slowdown in demand started, they maintained a higher sustained occupancy and revenue without reducing rents as aggressively as their comps.
Precision pricing and pinpoint adjustments better position rents
Driving adoption of YieldStar revenue management software is the tool’s pricing precision and ability to make adjustments based on internal supply and demand and dynamically calibrated elasticity, which discourages stimulating rent velocity by offering deep concessions like free rent, Dunkin says.
In a down market, rather than reacting with what could amount to significant discounts by offering periods of free rent, an operator could attract velocity with smaller discount based on, for example, the availability of one-bedroom apartments.
“It only takes a small adjustment in price to actually position yourself more effectively relative to that competition and get slightly more of the share of demand you’re trying to accomplish.”
And when the market improves, returning to more desirable rate levels will be easier, Dunkin says.
“The beautiful thing is when the markets do turn, then your relative position is so much stronger and you can accelerate that on the rent side. For a declining market, if it happens and it’s pronounced, there are tools out there to help you outperform.