The apartment industry’s envy of the hotel industry was on full view during the 2015 NMHC Spring Board of Directors Meeting. Why? Two words: data benchmarking. For 25 years, the hotel industry has benefitted from a universal benchmarking standard known as RevPAR, or revenue per available unit.
For 25 years, Smith Travel Research (STR) has been compiling RevPAR metrics, and today collects performance data from more than 46,000 hotels, representing more than 5.3 million rooms globally.
Acting as an independent and secure, third-party data exchange, STR enables hoteliers to benchmark the achieved revenue of their hotels with their closest competitors at the submarket level.
“RevPAR brings consistency, transparency and certainty to all stakeholders in lodging asset performance - from hotel managers to institutional investors,” said Jan Freitag, senior vice president of strategic development for STR. “Each participating hotel knows exactly how they’re performing versus their closest competitors and submarkets, allowing companies to address operational concerns and improve performance regardless of submarket conditions. It works for hotels and any other industries that have conditions of fixed capacity and variable demand - characteristics that the apartment industry shares.”
Compare that to the apartment industry, where Sue Ansel, president and CEO of Gables Residential, detailed the seven various tools executives at her company use to try and benchmark its portfolio’s performance. And still none of them delivers an accurate picture of how its apartments are performing against its closest competitors.
As Ansel described, executives are usually gathering competitors’ asking rents and trying to compare them with actual results, which not only isn’t accurate, but also doesn’t account for renewals. What she would like is a way to compare the revenue the company actually collected with the actual achieved revenues of its competitors.
This disconnect between the hotel industry and the apartment industry benchmarking capabilities has caused more than one multifamily CEO to ask: Is an STR report for multifamily a viable solution for the apartment industry?
The first step in getting to an STR report is mass adoption of revenue management technologies and processes. Check. The apartment industry has several years of experience with this, even though it was late to the game. However, unlike other revenue management industries, multifamily never developed a universal standard to benchmark achieved revenue.
David Schwartz, CEO of Waterton Residential, which has hotels and apartments in its portfolio, summed up the value of an STR report for his hotel properties: “The STR report in your toolbox is like your hammer, your screwdriver and your wrench. It’s a critical tool that our team uses all the time.”
He even admitted to being guilty of the Freitag’s anecdotal reports of clients checking the STR report in bed late Tuesday evenings when it comes out. “It’s that critical,” said Schwartz.
If the apartment industry had a comparable measure, revenue per available unit for instance, operators could accurately determine how an asset is performing relative to its comps.
How could apartment firms use that information? Schwartz detailed how his firm uses it for its hotel properties. “We use it for compensation, we use it for bonuses, it’s included in our management contracts - if your REVPAR index is below 85 percent for six months, your contract is terminable. We use it for due diligence on acquisitions. It’s also how our investors are looking at our performance.”
“If your goal is to attract more money to your industry, you need to do this,” said Freitag.
Attendees at the meeting had a robust discussion about the differences that exist between the two industries, namely lease duration and unit mix, and whether those were insurmountable obstacles to creating a STR-like report specific to multifamily.”
But Freitag discouraged that line of thinking. “If you go down that rabbit hole, you’re never going to get to benchmarking. The data is what the data is. Don’t let this be the impediment to doing this,” he said.
Monitoring the revenue gap between an apartment community and its competitive set over time would enable operators to better understand whether an individual property’s share of submarket revenue is growing or shrinking.
Without that, owners don’t know whether their highest performing communities are benefiting from being in hot submarkets or whether they’re actually outperforming the competition.
From the banking perspective, such a metric could be very useful.
“Regulators are not in love with commercial bank construction, and we would love to have one metric to show what is going on in the market based on the decisions renters are making,” said one active lender in the audience.
Freitag concurred, noting that without STR, the cost to finance housing would be much more expensive.
One critical element of a multifamily STR, according to Ansel, should be that it is software agnostic. “The best data will come from your property management system (PMS), but the metric itself shouldn’t be limited to the users of a specific PMS,” she said.
For more information on the STR report and process, see Freitag’s presentation here.