Multifamily Housing - Case Study

Harbor Group Uses LRO to Maximize Returns on Value-Add Projects

Harbor Group Management

Profile

-Established – 1987

-Headquarters – Norfolk, Va.

-Regions Served – Northeast, Mid-Atlantic, Midwest, South and Texas

-Units – 30,000 (Harbor Group owns about 85 percent of the units it manages.)

-Rainmaker Products Used – LRO

Executive Summary

Harbor Group Management, which manages 30,000 apartment homes nationwide, implemented LRO in 2012. A goal of the company’s was to more effectively optimize rent premiums on value-add projects and maximize ROI on strategic apartment renovations. By utilizing the market competitor information collected in LRO and applying that to LRO’s pricing engine, Harbor Group has developed a clear understanding of what its markets will bear when it comes to renovations.

The software’s key tools and reporting features help Harbor Group gather precious market information on competitors’ pricing, calculate classic product pricing and calculate rent premiums to reap the maximum ROI benefits of renovations to apartments.

Business Objectives:

1. Set classic product baseline prices to optimize rent premiums.

2. Push rent premiums to reap the benefits of renovations and drive revenue on value-add projects.

3. Better enable teams to determine revenue goals and achieve them through pricing.

Results, ROI and Future Plans

1. LRO has allowed Harbor Group to configure the pricing of classic units and renovated units specific to market competitors, and enabled price integrity between classic and renovated units.

2. Portfolio-wide, Harbor Group has aggressively grown rents for its renovated apartment homes. For example, at one Dallas community, the company increased rent per unit (RPU) by 19 percent in just over two years.

3. Harbor Group has greater transparency into the actual ROI of renovations and can proactively adjust pricing if the ROI is not meeting or exceeding investor goals.

The Challenge: Create effective premium prices that maximize returns on renovations

Like many other apartment management companies, Harbor Group sees a real ROI opportunity from value-add projects. But before 2012, the firm lacked a reliable way to gauge competitors' pricing as well as market demand for renovated units. As a result, the company could not dynamically optimize its rent premiums to fully reap the benefits of upgraded apartments. In 2012, Harbor Group implemented LRO to handle pricing across its entire portfolio and began to reap the benefits of the solution's ability to price both classic and renovated units across distinct markets.

To maximize ROI from value-add projects, the rent premium on renovated units had to be just right. LRO’s market analysis and reporting tools have helped Harbor pull competitors’ pricing to better understand baseline pricing for classic units, and create premium prices from those baseline prices. With this data in place, Harbor Group has been able to push rents, better manage lease expirations and more accurately determine the seasonality of a property to plan for renovations.

Kevin Huss, director of revenue management at Harbor Group, said LRO has efficiently optimized Harbor Group’s value-add premiums and helped the company push rents on renovated units because the software takes the emotion out of pricing. Harbor Group recently increased its value-add portfolio by 10,000 units and expects to add another 2,000 by end of the first quarter in 2018.

LRO’s tools examine a vast range of factors, including competitors’ pricing, submarket conditions and leasing velocities, which helps Harbor Group create starting price points for its classic apartments, i.e., those that haven't been renovated. With baseline pricing set for classic units and a built-in rate of return that Harbor Group wants to achieve with its value-add units, LRO is able to create dynamic pricing for Harbor's renovated units.

“LRO gives you a good starting point for the baseline price of that classic product, and shows you how the product rents,” Huss said. "Once we’ve identified our targeted return on the renovation LRO provides metrics that make it very easy to understand if the renovation premiums were spot-on or in need of adjustment.”

Results: Revenue growth from value-add portfolio

With LRO’s algorithm-powered pricing and market comp analysis, Harbor Group’s leasing teams have been able to better understand and predict where the market is heading and drive value-add rental growth. LRO tools that analyze leasing pace and leasing velocities – like the Days on Market Analysis (DOMA) – provide invaluable insight into understanding if a rent premium for a renovated unit is the right price. LRO’s built-in rent driver tool and ability to pull multiple reports has allowed Harbor Group to have greater transparency into the actual ROI of renovations to exceed investor goals.

With its use of LRO, Harbor Group has aggressively grown rents across its value-add portfolio. For example, at a community in North Dallas, the firm undertook renovations and increased RPU by 19 percent over the course of its 31-month ownership of the property. With such significant returns, Harbor Group sold the property almost two years ahead of schedule.

LRO’s sophisticated lease expiration management (LEM) function has also helped Harbor Group execute successful renovation projects. The feature enables operators to better control vacancy exposure by accurately timing the expirations of leases. With LEM in place, there is greater visibility to ensure there isn’t a large number of units coming vacant during periods of weak demand, or conversely, that there are sufficient units available for rent during peak lease seasons.

The LEM function gives Harbor Group the ability to plan the timing of renovations to fully align with seasonal market demand. “Upgrading units is part of our plan to increase the value of our assets, and LRO helps us know the ideal time to start the renovation of a unit and the ideal time to have it ready for leasing,” Huss said.

With its adoption of LRO, Harbor Group has benefitted from a holistic, data-driven approach to value-add pricing. LRO assists Harbor Group in setting base rents on apartments without renovations, and provides the kinds of market data the company needs to fully understand and accurately calculate what the market will pay for renovated apartments.

LRO has taken the emotion out of pricing and therefore pushed Harbor Group’s rent premiums to levels that renters will readily pay, but that pricing teams themselves might be too sheepish to seek. By utilizing LRO’s valuable market insight and revenue-driving tools, Harbor Group is able to optimize its pricing of both classic and premium units, maximizing its ROI in the process.

“LRO is an exceptional revenue-driving tool, and since Harbor Group started using it five years ago, we’ve significantly increased the value of our properties, which is exactly what we want for our investors,” Huss said.