The Demand Solutions Blog

Gross Potential Rent: A Case Study in Wrongheadedness

Posted by Donald Davidoff on Oct 22, 2019 8:54:05 AM

In recent weeks we've been both thinking and writing about two things: pricing and revenue management (PRM) skills and the possible impact of an economic downturn.  A recent conversation reminded me of another related topic: the metrics we use to measure performance.

Given the importance of pricing and business analytics to our success, the metrics we choose to measure performance matter.  Yet while the industry has made great strides in employing ever-more sophisticated software, many processes and rules of thumb remain that have not caught up to where the technology is.

There is perhaps no better example than the metric "gross potential rent" (GPR). This metric is so ubiquitous that many property management systems (PMSs) embed it in their data model and standard reports.

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Topics: Revenue Management, pricing and revenue management, financial performance, Leasing Performance

Is Your Bonus System Hurting You?

Posted by Donald Davidoff on Sep 26, 2013 5:26:00 PM

Funny thing about bonus systems —you often get exactly what you incent. Now that doesn’t mean you get what you want. It means you get what you incent. So here are a couple of pet peeves of mine that I’'ve seen w.r.t. bonuses in multi-family that at best just waste money but at worst actually hurt our pricing and revenue management efforts:

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Topics: Revenue Management, apartment, property management, apartment operations, apartment pricing, multi-family housing, pricing and revenue management, financial performance

Budgets are Looming

Posted by Donald Davidoff on Jul 9, 2013 1:27:00 PM

As we enter the “dog days” of summer, it’s time for pricers to look ahead. Things are usually good right now—we have a strong tailwind from seasonality so rents and occupancies are trending upward nicely. And with various summer vacations going on, the pressure isn’t quite as high as it usually is—most operators and executives are happy with the trends, and some of them aren’t even in the office today anyway.

But as anyone who’s been doing multi-family pricing for any length of time knows, beware the coming of the 4th quarter. For though the kingdom seems at peace, we know that ill winds are about to blow. Come September/October, two things will conspire as we face what is often our biggest enemy:  the BUDGET; and it’s almost equally evil sidekick, the operator’s bonus.

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Topics: Revenue Management, property management, apartment operations, apartment pricing, pricing and revenue management, financial performance

KPIs: What Exactly Are You Trying to Measure?

Posted by Donald Davidoff on Jun 27, 2013 10:50:00 PM

So I've been doing this D2 Demand Solutions thing since I left Holiday Retirement a bit more than 7 months ago. I counted that I've now worked with an even dozen clients [ok a) there's no such thing as an odd dozen and b) why is it that I'm compelled to count things? Have been since I was a kid no wonder I got into metric-driven analytics]

Anyway, the point I want to make is that across virtually all of this client base, I have found an almost never-ending pursuit for the perfect metric (or metrics) that simple set of KPIs that will do everything we need to know what's really going on in our business. And I've realized that part of why this is a virtually impossible quest is that there are really two VERY DIFFERENT purposes for a metric.

Financial metrics/dashboards/reports

As the name suggests, these metrics deal with financial results. For public companies, they give us advance insight into what the EOQ numbers are going to look like; for private companies, they're really what our owner cares about it's all about the cash in bank.

The trouble with financial metrics is that they can show skewed data that leads to incorrect assumptions about how operations/sales is performing. For example, if I forecast 95% occupancy for the community and I hit that number BUT my 1BR occupancy is 97% and my 2BR occupancy is 92%, my financials will be below budget (and vice versa if the 2BRs are the higher occupied unit) just because of the sales mix. This is particularly an issue if you look at a metric like month-over-month (MOM) new rents if I sold 10 2BRs last month and 5 1BRs and this month I do the reverse and lease 5 2BRs and 10 1BRs my MOM new rents look way down. But it's just a temporary sales mix thing, not poor sales performance. 

The thing is that these metrics still matter if I do sell more 1BRs than 2BRs, my cash in bank and my reportable revenue is truly lower, so I need to know that. But I DON'T WANT TO GIG OPS FOR JUST A SHORT-TERM SALES MIX ISSUE.

Business behavioral metrics/dashboards/reports 

Enter the behavioral metric which is great for operational dashboards and reports. With these metrics, I normalize for the sales mix. For example, I can calculate a new rent at the unit type level and then aggregate up to a community-level new rent by using a UT-count weighted average of the two. This fixed ratio gives me a number indicative of the community-level rent, but it won't tie to financials because I normalized away the sales mix. It will, however, show me whether my underlying rent trend is up or down because sales mix variances won't affect this metric.

I can do the same thing for unit-level amenities. I can strip away the unit amenities and track base rent movements. Again, these won't tie to financials because amenity upcharges are real, but this metric won't have volatility simply due to changes in sales mix of highly amenitized vs base units being rented.

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Topics: Revenue Management, apartment operations, financial performance