Revenue management software is becoming an increasingly important pricing tool.
Steve Tappert of revenue management firm Rainmaker likens the difference between leasing a conventional multifamily property and a student housing property to the difference between waiting for a train and waiting for a cruise ship. If you miss your train, you may wait a couple of minutes for the next one. If you miss your ship, you will be waiting at the dock for quite a while.
Student housing operators face this reality every leasing season. For better or worse, once the first day of fall classes begin, an operator will have to look at roughly the same occupancy and rental rates until the following fall. It is within this high-stakes environment that revenue management technology has burst onto the scene.
“Student housing is faced with the same types of problems that multifamily faces,” says Tappert, vice president of strategic initiatives for Rainmaker. “They want to know how to price between occupancy and rent to get the highest return on their investments.”
Revenue management, in its simplest terms, attempts to solve this problem by analyzing the supply and demand dynamic of a market. The devil is in the details, though, when it comes to how to determine that price.
Rainmaker got its start in the airline and hospitality industries, which also place vital importance on revenue management. Approximately seven years ago, it launched a multifamily revenue management product called LRO. According to Tappert, a majority of the top 10 multifamily REITs are now using it.
The company soon saw that many of its multifamily clients were also active in the student housing space. Many of them were also trying to use conventional multifamily revenue management software on their student housing platforms.
“You can’t just shoehorn a multifamily solution onto a student housing asset — it won’t work,” Tappert says.
Last October, Rainmaker launched a version of LRO specifically for the student housing industry. LRO Student analyzes historical property data as well as market data to determine how to set the right rent price for a given unit type in a particular community.
LRO Student takes into account the unique aspects of student housing properties when projecting prices. Apart from a different leasing cycle, individual units are often leased by the bed rather than by the unit. Operators are ultimately limited in the number of times they can renew a tenant, as graduates seldom remain in student housing. The potential customer base is also limited to the student populations of nearby schools and can be even further limited by on-campus housing requirements and enrollment changes.
“A lot of what we did, especially during the design phase, was try to figure out what exactly is it we need to measure and what types of behaviors we can then use to create a forecast of what’s going to happen next time,” says Tappert, who also served as the product architect for LRO Student.
Starting from the ground up, Rainmaker developed an online platform catering to this niche multifamily market. Users input their own property data as well as data related to their target student body populations and their competitive environments. The application’s pricing engine analyzes this data along with entries from other users to calculate the best price for the market. Not only are users able to see updated prices daily, but they can also review weekly statistics to see how a certain price performed in the market. Currently, LRO Student is in beta test with Inland American Communities and Carmel Partners’ properties.
Capturing Multi-Market Data
RealPage, whose Yieldstar platform is widely used in the conventional multifamily space, currently covers approximately 1 million units in the multifamily industry. Four years ago, RealPage entered the student housing realm with two applications, OneSite Student and Yieldstar Student Housing. OneSite serves as the company’s core leasing and property management offering. YieldStar is its revenue management platform.
“Yieldstar facilitates everyone being on the same sheet of music when having dialogue around pricing, which can help the process significantly,” says Keith Dunkin, vice president, market development, for Yieldstar.
Yieldstar Student Housing functions in a similar way to LRO Student in that users are able to input community data, which provides valuable historical information when it comes time to project future pricing. RealPage gathers community data from other OneSite and Yieldstar users to help paint a more complete picture of the market. RealPage also leverages MPF Research, its multifamily research arm that was founded in 1961 and presently tracks approximately 7 million multifamily units nationwide.
The Yieldstar platform uses a complex algorithm to analyze all of these data sources to come to a suggested price point. Dunkin says that Yieldstar Student Housing has improved user revenues by 3 to 7 percent relative to the market.
“We have a proven track record on a sustained basis for the past four years with the same partners and the same assets,” Dunkin says.
Yieldstar Student Housing will only get better in the future. According to Dunkin, a dozen partners have signed up for Yieldstar Student Housing in the past year. In addition, as market penetration for Yieldstar Student Housing increases, its user-supplied market data will become even more complete.
“RealPage is fully committed to the student housing industry,” Dunkin says. “We’re investing significantly within our existing OneSite portion of the platform and the ancillary products associated with it. We are continuing to invest heavily in our Yieldstar revenue management piece. We are passionate that student living is an evolving marketplace, and one that we want to have a leadership position in.”
Real World Revenue Management
With the advent of revenue management software, one would think that student housing operators could just kick up their heels and let the software handle the pricing for them. But quite the opposite is true.
“We have yet to identify software in the student space that we think captures a significant number of data points so that the predictive capability is sufficiently accurate for us to make sound decisions when it comes to pricing,” says Derrick Milam, COO of Woodlark Companies, a White Plains, New York-based student housing owner/operator.
Woodlark primarily operates in secondary and tertiary markets in the Midwest, Southeast and Southwest, where there is a dearth of data comparedto primary markets. The company does use third-party revenue management software, but it relies a lot more on its historical property data and its team members to make future projections. Woodlark’s process begins by comparing its revenue management software’s projections against historical data. The company then brings in its marketing, asset management, property management and finance teams to reach a final price. Revised projections and regular feedback from leasing teams then let the company know if rates need to be adjusted.
“A combination of third-party software, the tweaks we make based on historical data and the daily interactions with our sales force has allowed us to really match pricing well with client segments we’re pursuing in each of our markets,” Milam says.
Woodlark’s approach has been successful. Last year, a community the company owns near Texas State University in San Marcos named The Heights II finished the leasing season below expectations. The company tweaked the property’s revenue management process, and The Heights has seen a big turnaround this year. The community is 95 percent occupied for the second semester of the academic year, and its 4 percent increase in pre-leasing for the 2012-2013 school year was leading the market at the time of press.
“We are still seeing revenue gains from where we were last year based on the rents we were charging,” Milam says.
Chicago-based The Scion Group does not utilize revenue management software. The owner/operator does utilize RealPage’s OneSight software for prospect management, but it uses in-house historical data and analysis to set pricing.
“We meticulously track rates at which each one of our unit types in each one of our markets is leasing, and that helps us to determine where to set rates,” says Samuel Mtunga, director of leasing and strategy for The Scion Group, a Chicago-based owner and operator of student housing.
The company also tries to avoid a reactive approach to leasing. Many companies will utilize concessions or rate reductions if they feel they need to make up ground in pre-leasing. It is a common opinion among student housing operators that a rush to discounts can not only lead to a race to the bottom in pricing but it conditions students to expect gift cards or free rent when they sign a lease. Scion, in contrast, tries to get the price right the first time.
“We set out at the beginning of the year to never lower our rates,” says Eric Bronstein, executive vice president of The Scion Group.
This company does not stubbornly maintain its numbers if a price point is not leasing well, but it feels that keeping a steady price gives it a reputation of reliability in the market. Bronstein says that this can sometimes give Scion the ability to raise rates during the leasing season, which entices students to sign early.
It would be a mistake to assume that revenue management software is an all-or-nothing decision — either use it to set your pricing or do pricing manually. As the student housing sector has grown, the amount and sophistication of market data has increased exponentially. Owners today are more informed than they ever have been.
“At the end of the day, what our partners continue to find is if they listen to the model in conjunction with their operational expertise, they end up with a far better answer from a revenue perspective than they would have otherwise,” says Dunkin.
— Coleman Wood