Headquartered in Denver, Colo., Simpson Property Group®, LP is an experienced, fully integrated real estate firm providing services in commercial and multifamily property management, development and construction. The Company is one of the largest privately held residential developers and managers in the nation with a portfolio of approximately 17,500 units owned by Simpson in 13 states across the U.S. Simpson was an early adopter of Rainmaker LRO™ technology in 2003 and today has its entire portfolio using LRO.
THE CHALLENGE: Optimize Lease-ups with Revenue Management
Bryan Hilton migrated into the apartment industry from the rental car sector as the LRO system was deploying and was hired at Simpson to manage the firm’s early adoption of this revenue management technology. Hilton’s extensive background in revenue management enabled him to establish a profound understanding of the platform and its capabilities with Simpson’s portfolio. So in 2007 when Simpson encountered a difficult lease-up at its Neptune property in Seattle, Wash., Hilton decided to attempt to prove the unproven: revenue management when applied to a lease-up would optimize initial revenue, avoid vacancy spikes associated with concession-based first year lease renewals, and stabilize the property more efficiently.
“Our lease-ups were traditionally priced using market rents and concessions. At the Seattle lease-up, we rented the lowest price studios very quickly but had great difficulty renting the higher-priced premium two bedrooms,” Hilton says. “This issue interested us in looking at how LRO software principles might be applied to solve the problem, particularly if the LRO system could significantly raise the prices on the studios and produce a revenue boost enabling lowered rents on our two bedrooms to decrease exposure and add even more revenue. We also wanted to decrease first-year vacancy loss.”
A tall order, for sure, and one that would require the Simpson team to attempt another first at the firm: the cloning of community statistical profiles to catalyze LROsystem functionality at extremely low occupancies, and at properties with no prior rent-roll history. Could populating a brand new community with an LRO data profile “cloned” from a similar community help to jumpstart optimization during lease-up, even if the properties were located in different states?
THE SOLUTION: Clone Leasing Histories, Unleash Technology
Leave it to an early adopter of LRO software to push the boundaries of revenue management technology. The complex process of cloning for lease-ups has evolved every year since the Neptune beta-test, and Hilton says LRO software has been with his team every step of the way, with success starting right at the beginning. “We quickly found the cloned histories pretty reliable,” answers Hilton. “Of course every market is different and some lease-ups will always be more successful than others, but we saw immediate results on our first lease-up at Neptune and have used LRO revenue management on every lease-up since.”
No mere crib-sheet, the cloning application of existing community data histories to new lease-ups was a complex process made possible specifically by LRO system architecture and functionality, Hilton says. In particular, LRO has hundreds of available data parameters which allowed Simpson to carefully fine tune new community DNA and turn on revenue management with communities at just 20 percent occupancy, unleashing the quadratic solver, linear programming math, and underlying computing brawn exclusive to LRO software that Hilton says was indispensable to the process.
“Both the lack of history and high exposure would appear to be barriers to using revenue management on lease-ups,” says Hilton, “but LRO has more than 200 parameters which can be used to customize a community based on how it is leasing.“ The combination of computing power with close monitoring of lease-ups (Simpson and community teams meet for weekly instead of bi-weekly pricing calls until stabilization) has consequently helped to maximize rents and lease-up progress right out of the gate.
“We start almost at day one to identify a sister community. At Neptune, we looked at another urban Seattle community with common seasonality and borrowed a lot of the statistics from there,” Hilton says. “We typically wait until the community is at 20 percent capacity to build a baseline, but from there cloned statistics have been very effective at powering revenue management until a property has been ‘live’ long enough to have a statistical history of its own. We’ve even successfully cloned from a community in Texas to a new lease-up in New Mexico that had very close market seasonality.”
Leveraging LRO software for lease-ups has also mitigated the need for Simpson to offer concessions. Since LRO pricing is based on effective, market-bearing rents and allows for dynamic lease duration, Simpson no longer has to worry about concessions catching up with market rents or heavily discounted renters moving out en masse when concessions expire.
THE RESULTS: Improved Absorption, Higher Revenue and Renewal Rates
According to Hilton, at the heart of Simpson’s decision to apply LRO software to the lease-up process was one main goal: to obtain revenue lift as measured against pro forma and market comps which the firm pegs at an average of four to six percent compared to traditional, concession-fueled lease-ups. The bonus has been higher renewal rates (of up to 15 percent) after completion of a community’s first lease cycle.
“If you’re using concessions and the market hasn’t reached where you thought your rents were going to be at the end of the lease term, you tend to lose a lot of residents, often up to 20 percent,” Hilton says. “If instead you begin with effective rent as generated from LRO software, your rents are already set to market. The lease terms generated by LRO also help with expiration management and allow for incremental customer revenues, where a lot of traditional lease-ups are only based on 12-month occupancies.”
Best of all, LRO software has stayed ahead of the curve as Simpson became more sophisticated with using the technology during lease-ups over the past several years. “The Rainmaker Group is continually adding and refining parameters that make using the LRO product on lease-ups even more efficient, including recent upgrades to the leasing velocity calculation allowing communities to weigh heavily on more recent market observations and amp-up even faster,” Hilton says. “There’s simply a great opportunity in using LRO revenue management software to maximize lease-up success. It has worked great for us and moving forward we won’t do lease-ups any other way.”