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Revenue management isn’t simply a software system that recommends a rental rate based on how competitors are pricing. Revenue management is a science that should employ key data, such as historical pricing trends, real-time traffic and supply-and-demand algorithms, as well as strategies such as lease expiration management and forecasting. And it should make all of these processes easy for you.
We sat down with Randy Wynne, revenue manager for General Services Corporation (GSC) to discuss how he has leveraged LRO’s Lease Expiration Management (LEM) system to gain better control of GSC’s portfolio-wide pricing strategies. Wynne recently spoke at the MAXIMIZE: 2015 Multifamily Asset Management conference.
Operations Insights: What is lease expiration management?
Randy Wynne: Lease expiration management analyzes market, property and unit level data to help owners and operators better control vacancy exposure.
We’ve come to understand with revenue management and LEM that prospects don’t look for a potential apartment home in a vacuum. Take home buying, for example: You see an influx in new homes on the market in the spring, because that’s when people are more likely out and about and are more likely to move — no one wants to move in the snow and cold.
The same goes for renters. In markets with harsh winters, prospect traffic will likely drop significantly November through February. Similarly, in markets with hot summers, people just aren’t shopping for a new home on days when temperatures eclipse 100 degrees. This is why it is important to have a strong control of your vacancies. If there is no demand, you need to keep your units occupied.
LEM looks at these historical trends, like seasonality, finds patterns and puts measures in place to more accurately align your lease terms to match those patterns. It offers the ability to better control vacancy exposure based on this type of true-to-life data instead of making assumptions based on steadfast rules. Without LEM in place, you are at a risk of having high vacancies and needing to offer substantial concessions to rent those units, which can have a significant impact on your net operating income.
OI: What is the goal of LEM?
RW: GSC’s goal is to deliver a monthly and annual turnover rate that will match or be slightly less than our monthly and annual demand for apartments. We want to be in full control of our pricing strategies and lead the markets we operate in.
There is an intricate balance between supply and demand. Other revenue management systems, or even an in-house process, like tracking on an Excel spreadsheet, cannot predict or react fast enough to changing supply-and-demand curves.
We have no idea what our competitors’ revenue management goals are, what they set their occupancy threshold at, etc. — and frankly, we shouldn’t care. LEM is all about what is happening at GSC communities and is customizable to fit our needs and goals. We’re confident we are as proactive as possible and not simply reacting to what our competitors are doing.
OI: What are some strategies you employ to manage your LEM?
RW: Long gone are the days of six- or 12-month-only lease terms. Prior to leveraging LEM, we used mostly six- or 12-month leases. What we didn’t realize is how significantly we were limiting our revenue potential by assuming people would never stay longer than 12 months or shorter than six.
When we launched LEM, we decided our focus was going to be on shifting consumer behavior by bucking the trend of six- or 12-month leases and employing premium values to undesirable lease terms. Analysis of historical supply-and-demand data available in our revenue management system quickly revealed seasonal traffic and turnover patterns. Based on these patterns, we began adding premiums to specific lease terms and/or calendar months, garnering greater control of our turnover rates and exposure trends.
We have also tried to control the number of lease options that can be both aggressive and limiting. We opted against this approach as we found ourselves being less aggressive with renewal increases and even having to lower the asking price to attract a new resident.
For GSC, adding premium values is what works best. Since we started this with our LEM practice, we are seeing great results.
OI: How do you manage any perceived problems or challenges associated with an LEM strategy?
RW: As LEM is customizable and specific to your portfolio needs and overall revenue management strategy, the challenges come from a lack of understanding your operational capabilities.
Maintenance obviously plays a vital role in turnovers. You need to have a strong grasp of how long turnovers take, how your teams manage the process and how seasons can impact their workloads. If you know they take an average of five days to turn an apartment, why would you schedule six units to vacate at once? That would take them an entire month to get all the units ready.
Second is training. Your leasing team needs to have a keen understanding of why LEM is important to your overall occupancy and revenue management strategy. They need to know how staggering lease terms and vacancies impact the entire year and be able to effectively sell preferred terms. Without these pieces in place, your LEM practice will never succeed.
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