Magazine article Journal of Property Management

Yielding Results

Magazine article Journal of Property Management

Yielding Results

Article excerpt

Removing the human factor from pricing may boost revenue

The human touch is irreplaceable in some areas of property management. Rental pricing is not one of those areas, said industry insiders who see yield-management software as the future of the multifamily housing market.

"Previous to going with the technology, pricing was decentralized, and a lot of it was based on intuition and gut feelings," said Bryan Hilton, vice president of revenue management for Denver-based Simpson Property Group, which currently uses the software. "Because of the complexity in pricing, you really need a tool tailored to help make [pricing] decisions."

Yield-management programs calculate historical lease data and current market force information to determine pricing on a daily basis. Two software programs designed for the real estate rental industry are on the market today, and a few large property management companies are using the programs.

REVOLUTION TAKES FLIGHT

While using yield management software is not currently the industry standard, some say the buzz around the pricing tool may be the beginning of an industry revolutionmuch like the revolution in the airline, hotel and car rental world, years ago.

In the 1980s and 1990s, large hotel chains and air carriers began using the software to price out rooms and seats. In the 1990s, they started posting their prices online. Soon, third-party sites were collecting the data from various companies and publishing the information on a single site. The technology evolved into automated, Internet-based, realtime pricing sites like hotels.com and Travelocity.

The software not only allowed hotels and airlines to fill rooms and flights, but it allowed them to book the spaces on an individual basis, at rates maximizing their profitability. Capable of measuring actual demand and forecasting future demand by considering buyer behavior, competitors' prices, seasonal patterns and other factors affecting sales, the software calculates the best and most accurate price point to deliver to consumers.

American Airlines saved $1.4 billion over a three-year period when it started using revenue management software.

"Pricing requires a mathematical framework: You need to put it into software so you can calculate rapidly, explore a lot of possibilities and come up with the one most likely to increase revenue," said Paul Davis, professor of mathematical sciences at Worcester Polytechnic Institute in Worcester, Mass. "Math guides the computer's ability to crunch a lot of numbers and [come to conclusions] that would be intuitively obvious to a human if the human had the time to go through everything."

OLD ISSUE, NEW TECHNOLOGY

While the real estate industry doesn't rely on yield management to the extent the travel industry does, the concept is a powerful tool, and its time has come for rental properties, said Donald Davidoff, group vice president of pricing and revenue management for Archstone-Smith, a publicly held apartment investment firm based in Denver.

Archstone has assets of nearly 90,000 units and owns the license for three-year-old Lease Rent Optimizer, the first of two yield management programs available for rental properties. Davidoff also oversees sales for Lease Rent Optimizer.

"Over the last five-plus years there's been a growing sensitivity to the notion that the old-school, gut-level, rule-of-thumb pricing may not give optimal results," Davidoff said. "[We started asking ourselves] 'Can we use price as a lever to get the right customer into the right property at the right price?'"

Looking to sophisticated technology to drive up profits was a natural progression, Davidoff said. He said thoughts about rental properties began to shift with the proliferation of publicly held real estate investment trusts (REITs) and their fiduciary responsibility to prove quarterly profits.

"It used to be that everyone made money on real estate deals, and operations were sort of the necessary evil," Davidoff said. …

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