SPECIAL FOCUS: TECHNOLOGY AND THE BOTTOM LINE

APARTMENT FINANCE TODAY • MAY 2008

Raise the Roof

Revenue management software is winning adoption among the mid-sized property management firms.

By Jerry Ascierto

The revenue management software industry continues to win more converts, although it still has miles to go before it becomes a common feature in companies of all sizes.

The software analyzes a variety of data—seasonal traffic rates, weighted competitor rents, and recent demand among them—to recommend pricing for a given move-in date, unit type, and lease duration, maximizing rents for each community in a property management firm’s portfolio.

Rainmaker has won many clients over the last year and continues to develop its LRO software, while RealPage continues to build out its M/PF YieldStar line. What’s more, Yardi is working on a scaled-down version of revenue management as a standard feature of its Voyager Residential line.

In a sense, the quicker that revenue management software is adopted, the better it is for every owner. Rent optimization is partly based on competitor offerings, so the more your competitors optimize their rents, the more you can push the envelope on what the market will bear. A rising tide lifts all boats.

But the industry has been slow to adopt the technology, partly because its cost structure favors the larger owners and partly because the software is still perceived as new and risky.

“Sometimes we become prisoners stuck in our own systems. I don’t believe that CEOs understand the value yet,” said Georgianna Oliver, founder and CEO of Evergreen Solutions, a technology consultant to the multifamily industry. “I think we need another dozen CEOs that are opinion leaders to speak on behalf of revenue management.”

While large companies like Archstone-Smith and Equity Residential have deployed the technology, small and mid-sized firms are still wary of implementing a system that may necessitate hiring more employees to manage the process. “It was devoured by the larger companies in 2007,” said David Cardwell, vice president of technology for the National Multi Housing Council (NMHC). “But we’re still only talking 100 companies out of thousands.”

The early adopters have verified the software’s value, which helps spread adoption. A 2007 NMHC survey of the revenue management industry found that about 4.7 percent of all U.S. units are using the technology, thanks in large part to its adoption by the biggest of the big real estate investment trusts (REITs).

Some firms may have to hire additional employees to manage their pricing strategy, though how many depends on the company’s size. Larger companies, like the biggest REITs, may need a full-time staff of three or four, Cardwell said, while smaller companies can get away with using part of a person’s time to manage the process.

Given the current state of the market, maximizing net operating income (NOI) has become more critical, which should also help to drive adoption.

“Largely, we’re a business built on acquisitions, on buying and selling,” said Jeffrey Roper, principal scientist of the M/PF YieldStar product line. “But with cap rates being where they are and as we head into a recession, NOI becomes a more critical revenue stream, and that brings attention to revenue management.”

Let it rain

Rainmaker has grown in the last years, adding 10 employees and winning more interest from the nation’s largest multifamily owners, such as Equity Residential, Simpson, and Post Properties.

The company’s LRO software is used on 355,000 units, including 64,000 units that were added when Home Properties and Babcock Brown Residential decided to deploy the software. Eleven other companies, representing 385,000 more units, are piloting the program, including AvalonBay and Lincoln, according to Tammy Farley, principal at Rainmaker.

Rainmaker updated the software this year based on customer feedback, making key performance indicators, such as pricing trend reports and the expiration profile of a property (when renters are up for renewal and what their renewal rate will look like) more readily accessible.

The company is also working on a dashboard feature, a sort of visual capsule that gives users a property-level view, an aggregate portfolio-level view, or a unit-type view of performance. Currently, users must run the reports manually offline, calculating the data themselves.

Rainmaker has a tiered pricing model ranging from a monthly fee of $3 to $4 per unit for smaller owners to around $1.75 or as low as $1.50 for the larger owners. The price includes ongoing maintenance and support. A self-hosted model is also available, but only the largest companies go that route. Still, many companies report rent increases resulting from the software of around 2.5 percent, some as high as 5.5 percent.

The software is starting to trickle down to mid-sized companies. Julian LeCraw, with a portfolio totaling about 6,000 units, recently deployed Rainmaker’s LRO product, and Weinstein Properties, with about 11,000 units, is piloting the software.

Wishing on a YieldStar

RealPage’s M/PF YieldStar has been on the market for about three years. The software is based partly on data compiled through M/PF Research, a market research firm with 46 years of archived data on 28,000 U.S. assets.

RealPage now tracks information on 10,000 communities, updating that lease transaction information daily— and not just from properties using RealPage’s OneSite property management system.

“We have YieldStar customers that aren’t necessarily RealPage customers,” Roper said. “So we’re collecting data from Yardi systems and MRI systems, and we’re up to about 1.5 million units that we have accurate rent, occupancy, and revenue data on.”

Among those 10,000 sites are many diverse geographies and asset types: from Class A in the largest metros to Class C in tertiary markets, including tax credit properties.

YieldStar’s strategy is to concentrate on mid-sized firms. Its product costs about $1.50 per unit per month. More than half of YieldStar’s clients are owners of less than 50 properties. “We’re very specifically trying to target the 10- to 40-site guys,” said Roper. “We’re not building something that’s going to require tons of head count additions.”

The company has finished work on a version of YieldStar aimed at student properties and is working on another targeted at affordable housing. And the company is working on three more products that it will roll out later this year. One is a forecasting product that uses price optimization data and information from Torto Wheaton Research and M/PF Research economic forecasts to estimate how rents and occupancy for a specific property or portfolio are expected to change.

“It’s a forward-looking 15-month forecast of rent occupancy and revenue by week and by floor plan, and every week we update it and roll it forward another 15 months,” said Roper.

Another tool slated for release later this year, a benchmarking product, is a database of operating performance data that companies can use to measure their own operating performance against. A third product shows rent, revenue, and occupancy comparisons of a user’s neighborhood peers by floor plan, site, market, and portfolio.

Equity Residential, which manages 124,000 units across the country, piloted LRO for 16 months on a dozen properties split between its Seattle and Atlanta markets. Those properties exhibited a 2 percent to 4 percent lift in income, convincing the company to roll out LRO portfoliowide in the last year.

Before installing the software, rents at Equity properties were set at the local level, with managers weighing competitor rents and occupancies. “But for every local property manager, you had a different philosophy in how you should price,” said Dave Romano, Equity’s assistant vice president of revenue management.

Equity found the product particularly useful when it came to renewal pricing. “LRO gets an understanding of what the market pricing of new leases will be in the future and tries to bring all of your expiring customers up to the new market rents,” said Romano.

Looking ahead

All of the major property management software providers—Yardi, RealPage, Intuit, and Domin-8—have either integrated or are in the process of integrating with the two primary revenue management software offerings, LRO and YieldStar.

And Yardi’s revenue management offering, in beta testing since last June, should help to drive adoption for the smaller firms. The product will require more user input and features fewer pricing factors than the two major revenue management products on the market. “It’s an alternative, not a full revenue management solution,” said Cardwell. “Their target is for those who don’t need all the bells and whistles but just want to implement a better pricing mechanism.”

But keeping up with the Joneses is a powerful motivator. “The more these technologies are proliferated, the more shareholders will demand that companies get on board,” said Romano. “Otherwise they’re going to miss opportunities to take advantage of the incremental revenue that these systems drive.”