Business Intelligence
Forecasting
Asset Management and Ancillary Income
Revenue Management and Pricing
2013 Apartment Revenue Management Conference Strategies eBook
Contents Welcome Letter...................................................................................................2 Revenue Management and Marketing: Envisioning the New Synthesis..................3 Customer Focus in Multifamily with CRM and Business Intelligence.....................5 Greg Cross: Rock and Roll Revenue Management................................................7 Digging Into the Profitability of Apartment Resident Loyalty..................................9 Keep Calm and Lease On: Improving the Apartment Pricing Discussion..............11 Examining Top Apartment Markets & Submarkets with Revenue Management.....13 High Impact Expense Management in Multifamily Housing.................................15 Top 10 Challenges to Apartment Asset Valuation Forecasting.............................17 Breaking the Infinite Loop: Software and Humans in Revenue Management........19 Better Input=Better Output for Multifamily Benchmarking and Comps.................21 Where Revenue Management is Broken.............................................................23
eBook Sponsored By
The 2013 Apartment Revenue Management Conference eBook Steve Lefkovits
Douglas S. Culkin
With vocabulary like business intelligence, predictive analytics, data mining and propensity to renew in vogue among multifamily pricing executives, risk managers and chief operations officers, it’s clear the world of apartment asset and revenue management is in an opportunistic evolution cycle. Once considered merely an applied software solution for asking price, yield management has been quick to impact entire operational and management disciplines, from finance and marketing to the art of the deal. Indeed, that the industry now has “pricing executives” at top levels of corporate management shows how far revenue management has come, and how fast. The Apartment Revenue Management Conference likewise evolved this year beyond a mere meeting on pricing trends to a clearinghouse of diverse content on the emerging deltas between pricing, technology, marketing and operations, as well as the growing importance and influence of a sustained, satisfying customer experience. With this emergent audience in mind, we looked to provide a broadly accessible (and fun) agenda that still remains sophisticated in the application of technology and new ideas to the business of apartment real estate. The Apartment Revenue Management Conference eBook covers every aspect of that expanded agenda including asset valuation, customer relationships, operations, ancillary revenue streams, expense management and marketing, not to mention the latest in renewal, comp, and pricing tactics and strategies. Join us in this look back at the highlights, top takeaways, and strategies shared at the 2013 conference complete with links to available presentation downloads. We think the times are anything but usual for apartment income and revenue executives, and are pleased to announce the rebranding of our annual event to reflect this dynamic and exciting change. Beginning in 2014, Apartment Revenue Management becomes the Multifamily Asset Management Conference. We hope to share the date and location details with you soon. Until then, thank you for joining us at this year’s conference—we’re looking forward to participating in the exciting pace of revenue management that lies ahead.
Sincerely,
Steve Lefkovits Executive Producer Joshua Tree Conference Group
Douglas S. Culkin, CAE President & CEO National Apartment Association
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Session 1
Revenue Management and Marketing: Envisioning the New Synthesis
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Session 1 Revenue Management and Marketing: Envisioning the New Synthesis
Like many other companies in the apartment industry, JVM is both excited and challenged by the growing access to and availability of lead, pricing, and transaction and conversion volume from screening, property management, and revenue management technology. “From revenue managers to marketing, we are drilling down to see what systems and strategies are excelling and those that are not working in terms of conversions,” Johnson said. “We have so many tools, and that’s where [enterprise-wide] communication is the most critical, because if we are not doing checks and balances, none of it is going to work.” While apartment pricing has traditionally been sandwiched between marketing and screening/leasing, the panel suggested that pricing can be a vital component of marketing per se, and that revenue management might
Among the three distinct groups of marketing, revenue management and screening, who really owns demand for lease prospects at multifamily apartment communities? More importantly, how can firms bring their organizations closer together for better decision-making to affect the volume of leads and lease conversions at single properties and across a portfolio of apartment communities?
Gina Johnson, Mary Herrold, Scott Villani and Rich Hughes kick off the 2013 Apartment Revenue Management Conference with the Revenue Management and Marketing: Envisioning the New Synthesis panel.
better excel as a multifamily operational discipline if moved into the marketing department. A key to any operational or reporting restructuring to synthesize departments will likely depend on the technological acumen across organizations. “We all want the best applicant leased up faster than any one else on the street,” explained Herrold. “The beautiful thing about where we are now is that departments are not silos anymore, and the tools we have with revenue management and measuring traffic and lease outcomes are there. So without sounding too preachy, I want to encourage all of us to become more disciplined in getting the most out of the tools and not “set and forget”. The answers are in our systems, we just have to go in and get them out.” n
“I do love that question of who owns demand, because the answer leads you to who the ultimate transaction gatekeepers are at apartment companies,” said RealPage vice president of strategic systems Rich Hughes, who moderated the Revenue Management and Marketing discussion with Pacific Living Properties director of marketing Gina Johnson, JVM Realty Corporation vice president of marketing and business development Mary Herrold, and NRP Group vice president of marketing Scott Villani at the 2013 Apartment Revenue Management Conference. “Organizationally it comes down to who can effect success,” said Villani as the panel discussed different reporting strategies and ways for organizing executive and operational staff for optimal success. “The success of marketing strategy has gotten ever closer to revenue management, and really, if the distance was shortened a little bit more it would likely result in better decision making.”
Download the Revenue Management and Marketing: Envisioning the New Synthesis presentation here.
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Session 2
Customer Relationship Management Systems and Business Intelligence
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Session 2 Customer Focus in Multifamily with CRM and Business Intelligence
Alliance’s talent management system has thus far been able to answer a lot of those questions with an online career portal integrated with applicant tracking systems and performance analytics based on core areas (financial, market performance, sales performance, service, compliance, customer feedback, and reputation) that are further defined by up to 20 additional key performance indicators. By directly recognizing individuals and teams who succeed, the result has been a corresponding increase in leads, lead follow-up, site visit traffic, appointment to lease ratios, and total number of leases signed. “We’ve already leveraged a strong correlation between follow-ups and traffic, and our ability to close and convert,” Mortera said. “The data is very powerful, but it is a big cultural change to make all of your data this transparent. It takes commitment and alignment to put a CRM and BI system in place that includes visibility into all interaction points.”
To understand what the impact of business intelligence to customer satisfaction in the multifamily industry will mean, you just need to know a little bit about barbecue. If you’re still in the dark, you need only know that barbecue in places like Texas, North Carolina, and Kansas City is an extremely complex, nuanced, days-long affair, and has little in common with throwing some bratwursts on the grill. “To that end, I want you to think about using Excel and think about all the analogy comparisons we did back in high school for the Scholastic Aptitude Test,” said Carmel Partners senior vice president of operations Erik Rogers, as he introduced the Customer Relationship Management Systems and Business Intelligence panel featuring ReLuminous cofounder Chris Brust and Alliance Residential senior vice president of performance Tina Mortera at the 2013 Apartment Revenue Management Conference. “Think of those analogies, because Excel analysis is to business intelligence as hamburgers and hotdogs are to Texas, Kansas City or North Carolina barbecue.” Indeed, the application of business intelligence (BI) tools to customer relationship management (CRM) systems within multifamily is game changing from a technology standpoint and necessitates a corporate-wide effort in order to be successful. “This whole idea of focusing on the customer is something new to our industry which has traditionally focused its systems and strategies on accounting,” Brust said. “BI is an enterprise level endeavor of reporting, analysis, monitoring, and prediction, and using CRM in these four areas is a challenge because we have historically modeled our systems around the transaction.” One firm that has embraced the challenge is Alliance Residential, which has just completed the launch of an internally developed talent management system allowing for BI analytics and performance metric analysis by job function as well as property and portfolio-wide. “We love the way revenue management provides a methodology for pricing, but what about other core elements of our business?” questioned Mortera. “What about people and places and product? How do we do a better job of creating systems that help us analyze that?”
ReLuminous cofounder Chris Brust and Alliance Residential senior vice president of performance Tina Mortera speaking on the Customer Relationship Management Systems and Business Intelligence panel moderated by Carmel Partners senior vice president of operations Erik Rogers at the 2013 Apartment Revenue Management Conference.
An integrated BI/CRM platform is not necessarily a cheap initiative either, the panel admitted, and changing people’s behaviors based on performance analytics can likewise be challenging. “Whether the ROI is clear at this point I don’t know, but I would encourage folks, even if they are using modest tools, to systemize processes as much as they can,” Brust said. “Feeding results back into the organization and changing strategic behaviors can be tough, because most people use BI the way a drunk uses a light post: more for support than for illumination.” n Download the Customer Relationship Management Systems and Business Intelligence presentation here.
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Session 3
Opening Keynote: Hotels, Rock and Roll and Real Estate
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Session 3 Greg Cross: Rock and Roll Revenue Management
Cross also addressed several multifamily pricing challenges—the use of social media and pricing based on emotion—and shared that such challenges are encountered in other industries. On the social media side, his estimation of the number of leads converting into stays because of the use of Facebook was in the single digits, and he detailed a recent tour by Pink Floyd front-man Roger Waters that lost over $10 million in ticket sales due to concerns over fan loyalty and optimized price rejections by Waters himself.
“Revenue management conferences can be inherently dull,” said a half-joking Greg Cross during his Hotels, Rock and Roll and Real Estate keynote at the 2013 Apartment Revenue Management Conference. As a 30-year hotel industry veteran, Cross is responsible for maximizing Hyatt’s guest room sales strategy for more than 500 hotels, and also boasts experience at Live Nation Entertainment, where he researched and recommended ticket prices for rock concert tours and created the functional requirements for a dynamic ticket pricing strategy. “So everyone thinks that Live Nation is the sexiest part of my career,” Cross continued. “But there’s nothing sexy about revenue management wherever you are. Jay Z and Prince would come into the office and walk right by me.” And yet Cross wowed conference attendees with a penetrating and often humorous insider’s look into revenue optimization for rock concerts and the re-emergence of the hotel industry from the “lost decade” of occupancy and price erosion following the Great Recession. “You cannot set aside supply and demand no matter what business you are in,” Cross said. “And furthermore you have to establish correct market-based pricing in all environments.” In particular, Cross detailed how industries often take a brand-centric approach during the absence of demand in order to differentiate their services from consumer-perceived commoditization of a market. “In our business you want to avoid being seen as a commodity, even though most of our customers are brand agnostic,” Cross said. “In the absence of demand, hotel owners look to steal share from competitors, but the truth is we have to appeal to brand loyal and brand agnostic customers and find pricing strategies that appeal to both.” Those strategies include continuing to embrace the double-edged sword of discounted price and marketing channels in order to dump unsellable inventory. “You can tell a Priceline customer when they walk through the door because they are wearing flip flops and carrying a cooler,” Cross said. “But implementing some disposable inventory channels is likely necessary. It’s marking down tomatoes in the grocery store just to keep them from sitting on the shelf and spoiling.”
You can’t always get what you want: 2013 Apartment Revenue Management Conference keynote speaker Greg Cross examines the delta of optimized pricing and fan loyalty in the rock concert industry.
Still, Cross believes in a revenue management future where people and processes trump calculations and computers, and also envisioned markets that are more brand-sensitive and brand loyal than they might be now. “Predictive technology is very much related to the development of the Internet, but you really do want a room full of the smartest people controlling things, because the technology itself is directional at best,” Cross said. “Just remember that revenue management itself was originally seen as intrusive, but it was not a challenge, it was a gift.” n
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Session 4
Baby Come Back: The Best in Renewal Analytics
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Session 4 Digging Into the Profitability of Apartment Resident Loyalty Multifamily professionals from executives to leasing agents believe satisfied residents are happy residents. Looking to buck the trend that satisfied is good enough, industry thought leaders on the Untapped Arbitrage: Resident Satisfaction session at the 2013 Apartment Revenue Management Conference suggested the industry needs to successfully transition satisfied residents into loyal ones. By engaging in loyalty-based customer retention programs, owners and operators are seeing greater returns from improved retention, increased referrals and a stronger bottom line. Customer loyalty is seen as paramount throughout other industries, explained panelist Francis Chow, chief strategy officer for Ellis Partners. “Take Apple and Starbucks. Loyal customers are willing to pay more for what is essentially a commodity,” he said. “Understanding where leverage is in the customer experience enables owners and operators to create new products and services to garner that loyalty.” In order to create loyal residents Equity Residential engages in simple two-question surveys to measure net promoter scores across their residential portfolio. “Measuring the difference between the percentage of customers who are totally and completely satisfied with you (raving fans) and those who aren’t provides us a greater understanding of our passive residents and detractors,” said Equity’s vice president of revenue Dave Romano. “You don’t just want satisfied residents, you want residents who sing your praises.” So how does this loyalty translate into greater returns for an owner, especially during a renewal process that includes rate increases? Equity finds that loyal residents in fact renew and refer more often, with satisfied residents more likely to renew at 63% and dissatisfied residents renewing only 34% of the time. Session moderator and principal of D2 Demand Solutions Donald Davidoff believes listening to what your resident is actually saying makes all the difference. “In response to our renewal rate increase form we received 10
a letter from a resident who had issues he needed fixed in order to stay at our community. He pointed out issues that were against our brand standards, enabling us to correct the value issue for him, and he ultimately stayed in our community.” To that end, Chow conducted a open-comment survey for a property which indicated a lot of individuals associated the notion of “home” with a smoke-free environment. However, when asked directly, only 65 percent of respondents were willing to pay to live at a smoke-free community (only 17 percent of people said they would be willing to pay more for smoke free). As a result, the community allocated a portion of their unit count to be smoke-free and were able to increase yearly revenue by $115,000, generating additional asset value by more than $1.6 million.
Francis Chow (L) and Donald Davidoff (R) look on as Dave Romano explains how loyal residents are the key to retention and renewals during the Untapped Arbitrage: Resident Satisfaction panel.
“You can’t underestimate the value of the open text comment answers,” said Romano. “The challenge is finding the consistent theme in those comments and understanding what your resident base is saying so you can work with properties to fix the problems.” n Download the Untapped Arbitrage: Resident Satisfaction presentation here.
Session 5
Secret Shopping and Pricing Discussions Gone Wrong
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Session 5 Keep Calm and Lease On: Improving the Apartment Pricing Discussion Technology is designed to make lives easier and improve business processes, so why in the consumer-facing reality of leasing apartments can technology become more of a hindrance than an advantage? “Technology, like revenue management, creates both physical and emotional barriers,” said Business Observations principal Kris Wegener on the Secret Shopping & Pricing Discussions Gone Wrong panel presentation at the 2013 Apartment Revenue Management Conference that also featured Beacon Communities marketing director John Reardon and Westlake Ventures managing partner and session moderator Dirk Wakeham. To illustrate the issue, Wegener shared compelling video examples of the common pitfalls found in pricing discussion with prospects: leasing agents who only look at the computer screen, clicking through the pricing system and neglecting to engage the prospect on their needs; agents who only look for the best pricing; and agents who try to explain
how pricing works and talk in terms a prospect doesn’t understand. “We are not allowing the time to build value during the presentation of product,” she said. “Sales associates need to be more informed [about revenue management], become trustworthy through knowledge [of how it works], conduct more frequent market comps and improve sales skills through practice and role play.” Reardon shared how these concepts were recently put to work at Beacon Communities, where his leasing and training team recently developed the 7 C’s of Leasing with Optimized Pricing: • Confidence: Encourage both sales and self confidence • Culture: If the heads don’t believe, the arms won’t achieve • Coaching: Customize shop reports for revenue management • Comp Knowledge: Understand hidden pricing differences like built-in utility fees • Connection: Explain with empathy, educate with knowledge and empower with options • Closing: Create urgency • Creativity: Have fun “Confidence and intelligence in the optimized pricing discussion is all about having fun,” said Reardon. “At Beacon we don’t want leasing robots, we want chameleons: leasing agents who can change and adjust on the fly. They have to have the confidence to show the value and close the deal.” n
Dirk Wakeham engages panelists John Reardon and Kris Wegener on how to create perceived value during Secret Shopping & Pricing Discussions Gone Wrong at the 2013 Apartment Revenue Management Conference.
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Session 6
Top 10 Submarkets Situation Room
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Session 6 Examining Top Apartment Markets & Submarkets with Revenue Management
Denton also detailed how REITs are outperforming the nation on effective rent growth. “They are doing it right,” said Denton. “They are operating in the right MSAs, in the right submarkets and using revenue management.” On average, REITs are outperforming the nation and trending between 1-2% higher in effective rent growth.
There is no doubt the multifamily industry is in an upswing right now, evident with sharply increased new construction numbers and continued growth to average rents. So when Axiometrics vice president of research Jay Denton sat down with Gables Residential REIT vice president Donna Summers to discuss the Top 10 Submarkets at the 2013 Apartment Revenue Management Conference, it was no surprise the impact that new construction, desirability and rent growth were having on markets and submarkets. What was surprising was the impact optimized pricing practices (or lack thereof) have had on markets across the country. “Dallas, Atlanta and Houston boast 50 to 70 percent of assets using revenue management,” said Denton. “When evaluating the performance comparison of markets and their submarkets, there is a significant correlation between revenue management adoption and the ability to push rents, maintain occupancy and minimize concessions, even in a downturn.” More specifically, when comparing revenue management to traditional pricing performance in the Atlanta/Fulton submarket, Denton found price optimization practices solidly in the lead. When looking at effective rents from January 2010 to July 2013, Axiometrics’ data showed revenue managed pricing not only started out at a higher rate but also doubled traditional pricing increases and added an additional $300 more per month to effective rents. Furthermore, occupancy at traditionally priced communities saw significant fluctuations between 91 and 95 percent while revenue managed communities held steady at roughly 95 percent.
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Axiometrics’ Jay Denton and Gables’ Donna Summers discuss the data during the Top 10 Submarkets panel at the 2013 Apartment Revenue Management Conference
Additional Axiometric findings included: • More than 450,000 new construction units are slated to come online in the top 10 submarkets (Houston, Seattle, San Jose, Atlanta, Denver, Dallas, New York, Washington D.C., and Minneapolis). • Top performing rent growth markets include Cape Coral, FL, Oakland, CA, Naples, FL, Boulder, CO, San Francisco, CA, Corpus Christi, TX, Denver, CO, North Port, FL, Seattle, WA and Portland, OR. • Oakland, Denver and Cape Coral are currently the top performing submarkets with 30 to 40 percent effective rent growth over the cumulative. n
For your own closer look at the data, download the Top 10 Submarkets presentation here.
Session 7
High Impact Expense Management
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Session 7 High Impact Expense Management in Multifamily Housing When it comes to minimizing costs and expenses across multifamily apartment portfolios, “behavior management” isn’t necessarily the term you’d expect to hear from owners who have been successful at socking savings back into the bottom line. Yet that’s exactly the modus operandi utilized by top firms finding exceptional expense management opportunities in cost centers ranging from payroll to utilities to bundled marketing and even technology hardware procurement. “Expense management is about thinking more than anything else,” said Brad Cribbins, executive vice president and COO of Alliance Residential, who joined Trammel Crow Residential vice president of asset management Nyla Westlake on the High Impact Expense Management panel moderated by Satteron Enterprises principal Jim Kjolhede at the 2013 Apartment Revenue Management Conference. “Organizationally we are trying to become more efficient relative to expense management,” Cribbins continued. “And we need to continue to press forward on that strategic thought conversation.” At Alliance, executive leaders have found success in motivating expense management behaviors with the firm’s Ultimate Increase Championship contest that rewards community teams and individuals for significant achievements in expense reductions. Standout expense management programs at Alliance over the past year included creation of an internal help desk, reduction in irrigation expenses, and an $8,000 reduction in bundled marketing costs. Alliance is also adopting policies that allow employees to use their own smart phones as a primary business device. Trammel Crow Residential has similarly empowered employees—particularly maintenance staff—to proactively work expense management across the firm’s portfolio. “Maintenance guys are always asked to do, do, do, and as a result residents interact with maintenance more than anyone else on site,” said Westlake. “It’s been a more difficult implementation, but we’ve begun quarterly maintenance visits to all units to head off issues before they occur.”
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Westlake also said there are still significant budget savings opportunities in utility and recovery line items. “I feel like it is one of the largest areas of improvement and if you’re not thinking about timers and occupancy sensors for fountains and corridors and common areas with [energy hogging] monitors and touch screens, you’re missing out on a big opportunity,” said Westlake, who noted savings of $1,500 a month by turning off a community fountain at night, part of a utilities effort that increased asset valuation by $1 million. “Expense management is about behavior management. Even if you don’t have fancy benchmarking, just paying attention can save you thousands of dollars, so focus.” n
Alliance Residential executive vice president and COO Brad Cribbins makes the case for more strategic expense management during the High Impact Expense Management panel that also featured Trammel Crow Residential vice president Nyla Westlake and moderator Jim Kjolhede (not shown).
Session 8
Asset Valuation Forecasting: Black Swans and the Top 5 Things You Can’t Control
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Session 8 Top 5 Challenges to Apartment Asset Valuation Forecasting
4. Political/Social Events: Social upheaval, political crises, terrorist attacks, crime and war. 5. International Events: Global economy shifts and changes to sovereign GDP as seen in countries such as Greece and (more recently) China.
Does Natalie Portman really have anything to do with apartment asset valuation? Well, not quite, but the Black Swan Academy Award winning actress still made an attention grabbing segue into the Asset Valuation Forecasting: Black Swans and the Top 5 Things You Can't Control panel presentation at the 2013 Apartment Revenue Management Conference. The real black swans, as it turns out, are horrific, business changing events including terrorism, natural disasters and economic collapse. However improbable those events may be, multifamily operators likely are not doing enough to prepare for them. “Climate change and floods may be things that you feel don’t affect you, and yet everyone seems to have a story to tell. These are events that you should be thinking about in advance before they happen,” advised VU University of Amsterdam assistant professor Dr. Wouter Botzen, who joined Alliance Residential director of revenue and research Blerim Zeqiri on the panel moderated by Harbor Group director of revenue management Kevin Huss. Botzen says Hurricane Sandy hitting New York City in 2012 is the classic black swan: an extreme event with a 1,100-mile wide wind field creating floods resulting in $50 billion in losses to some 88,700 affected buildings. Those losses might have been mitigated had the general public heeded expert advice to prepare for extreme weather events and flooding in the aftermath of Hurricane Irene in 2011. “Yet despite Hurricane Irene in 2011, when 300,000 people had to be evacuated from areas in the New York metro, only 20 percent of land owners took specific measures to reduce flood risk prior to Hurricane Sandy.” According to the panel, the Top 5 Black Swan events that multifamily owners need to prepare for include local, regional, and global incidents of both natural and human causation: 1. Natural Disasters and Climate Change: Including global warming, rising sea level, change to flood zones, earthquakes, tsunamis, tornadoes and wild fires. 2. Man-made Disasters: Nuclear accidents, oil spills, chemical accidents, infrastructure and logistical accidents and blackouts. 3. Financial Events: Global recessions, housing crises, and localized macro swings in employment and unemployment. 18
Kevin Huss introduces the Asset Valuation Forecasting: Black Swans and the Top 5 Things You Can't Control panel presentation featuring Dr. Wouter Botzen and Blerim Zeqiri at the 2013 Apartment Revenue Management Conference.
While Zeqiri profiled real-world examples of Black Swans including train derailments, chemical spills, and the accidents at the Chernobyl and Fukushima nuclear reactors, perhaps the most impactful example was that of a government shutdown. Using historical data on the impact of the 1994 government shutdown, Zeqiri detailed how the effect to U.S. Treasuries and corresponding interest rates could result in apartment owners having to raise rents $280 per month simply to cover an increase in debt service. “All of the sudden it makes a lot of our deals not look as profitable as we think they are,” Zeqiri said. “The truth is we simply don’t underwrite to these risks.” Botzen agreed, and cited myopia, overconfidence, and a misperception of risk as primary reasons why organizations do not prepare adequately for the unknown and the improbable. “Still, every night on the news there is some kind of disaster happening somewhere in the world, and property losses have been increasing and trending upwards since the 1950s. Why are disaster losses increasing? It’s not just climate change, we are also living with more people in more areas that are at risk, and we are exposing ourselves to more hazards.” n Download the Asset Valuation Forecasting: Black Swans and the Top 5 Things You Can't Control presentation here.
Session 9
Can You Beat the System? Human vs. Algorithm
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Session 9 Breaking the Infinite Loop: Balancing Software and Humans in Revenue Management Those familiar with the hit TV comedy “The Big Bang Theory” most likely find the computer-like mannerisms of main character Dr. Sheldon Cooper to be funny and endearing. But when Revenue Edge president Stacy Westbay played the Friendship Algorithm – a scene in which Sheldon gets stuck in an infinite loop of defined parameters and outcome sets requiring human intervention to free him – it was a comical eye-opening look at striking a balance between predetermined algorithms and human interaction and when to effectively “game” the process. Balancing human and technological ingenuity is all about equalizing, according to the Can You Beat the System: Human vs. Algorithm session at the 2013 Apartment Revenue Management Conference that also featured Carmel Partners director of revenue management Jessica Mills and Simpson Housing senior vice president of revenue management Bryan Hilton, both of whom challenged that neither software nor human capabilities alone are as successful as the two working in tandem.
Indeed, Carmel Partners often faces misconceptions from their leasing team including: “Residents who always pay on time should get a break on renewals,” and “Comps with higher rents means you can always raise your rents,” necessitating a balance between the algorithm and the human. “The amount of computer programming is huge,” Mills explained. “Humans couldn’t think of all the parameters to set, let alone replicate all that data. But there are things the system does not realize such as construction on the street outside. You need the algorithm but need the people to analyze that data.” For instance, had it not been for the availability of the human element and their ability to analyze data outside of the system, Carmel would have never learned their pet policy was a key driver for success in the company’s Denver markets. “The system can’t drill down into data to learn that,” Mills said. But how much human interactivity is too much when it comes to pricing apartment homes? At what point should revenue managers trust in the system? And at what point should they game the process? “Look at the numbers,” advised Hilton. “Computers can’t predict change but are designed to predict patterns and trends. The system may take that negative history and forecast incorrectly a year later because of it.” He challenges revenue managers to game the process by examining what happened in the past and determining where the market was. “If you ask all the right questions, you get to the correct pricing recommendation 95 percent of the time. Generally if you dig down enough you can find why you need to go with the system.” Westbay put it simply, “you have to drive the system and be able to work the two together to avoid the infinite loop.” n
Download the Can You Beat The System: Human vs. Algorithm presentation here.
Jessica Mills (left) smiles in agreement as Stacy Westbay explains the Infinite Loop during the Can You Beat the System: Human vs. Algorithm panel that also featured Bryan Hilton (not pictured).
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Session 10
Better Input = Better Output: Benchmarking and Comps
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Session 10 Better Input = Better Output for Multifamily Benchmarking and Comps Broad, fluid, dynamic and democratic characterize the apartment competitive sets that progressive owners are using to set prices and benchmark performance using revenue management technologies. Competitive sets, or “comps” as they are commonly known, continue to assist property managers with community and portfolio performance, and the process for shopping competitive properties for data has become a sophisticated, analytical process for maximizing revenue management output and asset manager business strategies. “We’re going on comp blitzes and sending teams of five to seven individuals across a variety of departments to shop anywhere from 10 to 15 competitors in a day,” said MAXX Properties director of revenue management Trachelle Spencer, who joined Cottonwood Residential director of property management operations Kathie Savage and MPF Research vice president of research and analysis Greg Willett on the Better Input = Better Output: Benchmarking and Comps panel moderated by Satteron Enterprises president Jim Kjolhede at the 2013 Apartment Management Conference.
Trachelle Spencer (left) and Greg Willett (right) listen in as Kathie Savage (center) states her benchmarking case during the Better Input = Better Output for Multifamily Benchmarking and Comps presentation at the 2013 Apartment Revenue Management Conference.
“As always, our comps are competitors that are in the same submarket, of the same age, in close proximity, with similar amenities, and where we are typically exchange
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our traffic and demographics,” Spencer said. “By looking at rents, deposits, fees, and value comparisons of the communities from different departmental perspectives, we achieve a very broad index where everyone knows exactly what a given submarket is about.” Cottonwood Residential has a similar democratic process in setting comps, reported Savage, who also noted that benchmarking property performance against itself historically and against a submarket as a whole help to enhance the understanding of asset performance. “By benchmarking on those different levels you are going to get a true indication of how a property is performing,” Savage said. “To identify comps, the first person we go to in choosing comp sets is the community manager because they know who they are losing customers to. Then the regional manager and also the acquisition guys get in on any necessary number crunching, so yes, it is a democratic process for us.” Willett cautioned immediately incorporating or discounting comps simply based on location proximity and amenity quality and curb appeal, or lack thereof. “Even if it doesn’t look like a comp, if it is at the same price level, it’s a comp,” Willett said. “But within that discussion, it’s also much better to have a big comp set than a smaller one. We also like to include properties that are a little step up and a little step down in the competitive set, because there are market shifts that impact how you can position your property relative to both better and worse performing peers.” Above all else, validate comp sets for accuracy, panelists said. “Keep apprised of your markets and be dynamic and fluid in maintaining your comp sets,” said Spencer, who has witnessed managers who choose only poorly performing comps to amplify fundamentals, and even one who chose a comp three hours away because it was built by the same developer and had similar floor plans. “You always have to validate information,” agreed Savage. “Particularly since the availability of data is going to continue to expand, allowing us to be more thoughtful and analytical in regard to the competitive set at both an aggregate and a granular level.” Willett concurred, and offered that best in class comp benchmarking isn’t so much about first place as it is about personal bests. “The goal is not to outperform the competitive set,” Willett said. “It is to understand your position within the competitive set. That is the strategy that will ultimately give you the most revenue lift.” n Download the Better Input = Better Output: Benchmarking and Comps presentation here.
Session 11
Beyond Buzzwords: Real Improvements in the Revenue Management Customer Experience
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Session 11 Where Revenue Management is Broken As expected, it was a no-holds-barred critique of revenue management’s fatal flaws in the airline and hospitality industries from Dr. Kelly McGuire, PhD and Executive Director, Hospitality and Travel Global Practice for SAS Institute during her presentation at the 2012 Apartment Revenue Management Conference. “We need to be more strategic, more customer focused, more technologically advanced. We are behind and we need to move forward quickly,” she said on the Beyond Buzzwords: Real Improvements in the Revenue Management Customer Experience panel that also featured Yardi industry principal of revenue management Dharmendra Sawh and JHP Consultants president John Pringle.“If we don’t do something soon in our revenue management practices,” McGuire said. “We will lose it.” Of course, before an industry can fix the problem, there needs to be an understanding of what is broken or may break the system. “Market forces over the last 15 years changed the way a consumer buys and revenue management systems have yet to adapt fully to these forces,” said McGuire. “And social media has only compounded the issue. Consumers can now look to their peers for pricing information. There is no longer price transparency, it is now about value transparency.” A disconnect between revenue management and marketing further compounds the issue, the panel said. In particular, the lack of communication between pricing teams, marketing teams and executive management creates confusion of what the final customer experience should be. While marketing is trying hard to create a positive consumer experience, a somewhat limited understanding of pricing and supply and demand can create the opposite effect by overwhelming the consumer with too many choices. “This is both the problem and the opportunity,” said McGuire. “We need to be more strategic, increase our presence and be more consumer focused. Revenue managers need to be asking about business strategies and why we are doing certain things in markets and with branding. This all influences pricing strategies and our ability to cut through the noise and be more effective.” Improving effectiveness in the ever-changing consumer landscape can be daunting. Even as hyper-connectivity among consumers provides the opportunity to ask questions 24
and engage through social media, it is also changing customer service expectations. Consumers are creating a market of 1: requiring revenue managers to know who they are and not put them into submarkets and subsets. “The customer experience changes from our internal need to optimize pricing,” said Sawh. “We [multifamily] aren’t yet at the single consumer data information and matching pricing, unit and amenities. From a revenue management perspective, that is how we can grow the customer experience and improve our pricing capabilities.” But is the multifamily industry really able to drill down to a market of 1? With a relatively small data set compared to large volume transaction industries like hospitality and travel, there is actually the potential to lose visibility on the consumer by segmenting too much, which makes building value transparency and brand loyalty more difficult according to Pringle. “By example, I have not seen revenue management effectively deployed in lease up,” he said. “I have not felt comfortable trusting a pricing system by itself to reposition a community. I believe you need to be monitoring all the amenities as the data and parameters we give our systems are so limited.”
Dr. Kelly McGuire, John Pringle and Dhar Sawh discuss revenue management trends on the Beyond Buzzwords: Real Improvements in the Revenue Management Customer Experience? Panel at the 2013 Apartment Revenue Management Conference.
The panel additionally touched on building social sentiments into value. In particular, even as consumers shift from using price as an indication of quality to using reviews instead, the jury is still out on whether that data should be used on a day-to-day basis in pricing or in an overall strategy. But keep this in mind, research presented by McGuire shows that for every 1-point increase in a rating relative to a peer set, there is a 11.2% increase in pricing power. n Download the Beyond Buzzwords: Real Improvements in the Revenue Management Customer Experience? presentation here.
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