DECIPHER™ Case Study 13:
Price Optimization, Redevelopment Analytics
Synopsis
By applying DECIPHER™ RVO’s recommendations, CAMDEN Tuscany immediately increased their weighted average rental rates for specific units and floor plans by over 12% within two weeks without loss of occupancy.
Background
Camden Property Trust is one of the largest publicly traded multifamily companies in the United States (13rd largest Apartment Portfolio 59,899 Units, and 6th largest REIT in the US in terms of total assets at $9.2 billion). Structured as a Real Estate Investment Trust (REIT), the company is engaged in the ownership, management, development, redevelopment, acquisition, and construction of multifamily apartment communities. Camden’s workforce totals nearly 1,800 employees, and the company is headquartered in Houston, Texas. As of October 31, 2014, Camden owned interests in and operated 171 properties containing 60,314 apartment homes across the United States. Camden was recently named by FORTUNE Magazine for the seventh consecutive year as one of the “100 Best Companies to Work For” in America, ranking #11.
Challenge
CAMDEN (an S&P 400 Company and one of the largest multifamily real estate investment trusts in the nation) engaged Competitive Analytics’ DECIPHER™ RVO model to research and analyze competitive pricing, optimize current pricing, analyze potential rehab and product repositioning/upgrade strategies, and forecast repositioned pricing for CAMDEN Tuscany, a 160 unit apartment community located at 1670 Kettner Blvd, San Diego, CA 92101. Prior to our analysis, CAMDEN Tuscany had an original weighted average rent of $2,078 with a 92.27% occupancy (based on YieldStar). In addition, based on CAMDEN’s in-house reposition analysis, CAMDEN Tuscany was estimated to yield a weighted average rent increase of $100 per unit after rehab/reposition of the property, resulting in an ROIC of 8.13%. YieldStar produced pricing recommendations that were over-reactive; by significantly increasing and decreasing rental rates within a very short period of time. Why? Because inventory-based yield models such as YieldStar, Rainmaker, and RentOptimizer adjust pricing based on a relatively small number of the thousands of vital “value components” that affect rental rates – which primarily are changes to vacancy, availability, and lease expiry. For CAMDEN Tuscany, this case study illustrates that YieldStar recommended significant rent decreases immediately after slight increases to vacancy . . . and soon thereafter, recommended significant rent increases only after CAMDEN followed DECIPHER RVO’s rental rate recommendations – which were very quickly achieved. Thus, YieldStar’s dramatic back-and-forth rental rate recommendations (see page 6) are metaphorical to using a hammer, which performs two primary functions – hammering nails (i.e. increasing rents) and removing nails (i.e. decreasing rents).
Solution
DECIPHER™ RVO “deciphered” a significant number of floor plans priced below optimized “price/value equilibrium” and recommended a weighted average rent increase of $89 per unit (prior to any upgrade scenarios) to reach the RVO optimized level of $2,167. One specific under-priced example was Tuscany’s 2 Bed 1 Bath floor plan which was priced $198 below DECIPHER’s “optimized price/value equilibrium.” It appears YieldStar’s recommended pricing was significantly underpricing CAMDEN Tuscany. After the reposition of CAMDEN Tuscany, DECIPHER™ RVO analysis suggested a weighted average rent increase of $176 per unit, resulting in an ROIC of 14.30%. Competitive Analytics also recommended that CAMDEN Tuscany increase rent to the RVO optimized level with tactical incremental rent increases over a specified period of time.
Results
By applying DECIPHER™ RVO’s recommendations, CAMDEN Tuscany immediately increased their weighted average rental rates for specific units and floor plans by over 12% within two weeks without loss of occupancy.
  • Occupancy increased from 92.27% to 93.94% (i.e. +1.67% percentage point increase in occupancy).
  • Gross Potential Monthly Revenue increased $7,012 (from $332,535 to $339,547).
  • Gross Potential Annual Revenue increased $84,144 (from $3,990,420 to $4,074,564).
In addition, if CAMDEN decides to apply the DECIPHER™ RVO recommended reposition figures versus their in-house recommended reposition figures, it will result in the following performance enhancements for CAMDEN Tuscany:
  • Estimated ROIC will increase from 8.13% to 14.30% (i.e. +6.17% percentage point increase in ROIC).
  • Gross Potential Monthly Revenue will increase $11,537 over original reposition estimated increases (from $15,200 to $26,737).
  • Gross Potential Annual Revenue will increase $138,442 over original reposition estimated increases (from $182,400 to $320,842).
  • The +$44 rent increase (i.e. approximately 50% of the recommended DECIPHER™ RVO price increases) and DECIPHER™ RVO recommended reposition figures combined result in the following performance enhancements for CAMDEN Tuscany:
  • Gross Potential Monthly Revenue will increase $18,549 (from $347,735 to $366,284).
  • Gross Potential Annual Revenue will increase $222,586 (from $4,172,820 to $4,395,406).
Return on Analytics
>1,600%
“My experience with Competitive Analytics spans back at least ten years. I have had them work on market studies and specific projects and in all cases I have found them to be professional, accurate, and very involved in the project and in each case I have found increased value in my portfolio and the information that I have received has been nothing short of exemplary.”
– Michael Brown, Division Vice President
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