As the multifamily industry embraces the internet of things, operators are finding different ways to approach investments in smart building technology. Technologies like smart access can change prospect and resident experiences, as well as make operations more efficient. When technology can improve both the revenue and the cost side of the ledger, there are several ways to think about how to measure return on investment (ROI).
Our last blog identified four different ROI sources that operators use in evaluating smart building investments: rent improvement, team productivity, changes to the operating structure, and improved marketing. In this post, we dig deeper into how we see operators thinking about rent increases, and in particular, the time it takes for a rent increase to translate into improved operating performance and, ultimately, asset valuation.
First, let's be clear. It's hard to establish cause and effect relationships that affect rent. Rental housing is a fixed capacity industry where, like hotels, airlines, rental cars, and so on, there is a limit to how much additional demand the supplier can service with supply. Operators can stimulate demand but can only generate additional revenue to the extent they have units available to rent.
Add to that the importance of location. Communities attract demand because of location. When the market experiences increased demand, the rising tide lifts all boats. It is hard to separate the impact of prevailing market forces from operators' demand stimulation activities, but that is not to say that game-changing amenities like smart access do not impact revenue performance.
We recently published a white paper that described how smart access technology improves living experiences. When communities enable their residents to move past the era of keyed entry, they enable their increasingly service-orientated lifestyles. Even before the pandemic made working from home ubiquitous, keys had already become an incumbrance as residents demanded deliveries, services, and guest access throughout the day on their own terms.
When a property provides a technology-enabled solution to this set of problems, it should expect to achieve a revenue gain in the same way that most amenities increase the rent on a given unit. The context of this increase varies from property to property, as amenity packages tend to be specific to individual communities. But it is hard to think of a community type where an enhancement like smart access would not have some tangible impact on rent.
While the size of the rent increase may be open to some debate, the costs of implementing the technology are fairly predictable. In the example below, we have estimated the costs of implementing smart access technology at a 300 unit property.
For the sake of the illustration, we have assumed a revenue increase of $20 per unit, which is consistent with the industry consensus view of $15-$30 in revenue increase when multifamily communities add smart building technology. At a 95% annual occupancy, the investment in both hardware and software pays for itself in under three years, with a 5-year internal rate of return of 41%.
That is not to say that $20 is all of the upside that communities experience from implementing the technology—as we described previously, the benefits of this technology are manifold. Nor should we regard $20 as a limit: many properties achieve substantially more than that. But if we believe that it is feasible for the technology to contribute $20 to an overall amenity package, then we can be confident that the investment will pay for itself within three years.
Although it is hard to be sure about revenue increases, there is a good statistical way to measure their impact. The key to understanding the impact of pricing upon performance is to measure the market response (i.e., whether demand levels suggest that the market finds a price change more or less expensive than the previous price).
The most effective way to approximate market response in rental housing is through "days on market analysis." This analysis compares how long it takes to lease apartments with an amenity compared with those that don't have it. For example, if the more expensive unit with the amenity takes longer to rent than the cheaper alternative, then the price point of the amenity is too high, and vice-versa.
Where an operator can create test and control sets, days on market analysis is an excellent way to ensure they achieve the revenue increase. Even with a modest increase, like the example above, the numbers are by themselves compelling, as the technology offers many benefits beyond rent increases, as we will continue to discuss in the following posts.
GUIDES
Smart building technology delivers a wide range of financial benefits for multifamily owners and operators. From cost efficiencies to improved customer experience, a strategic investment in the right technology solution can positively impact both the cost and revenue sides of the ledger.
There are several different ways to estimate how smart communities achieve ROI. Learn more about the four most popular approaches in our easy-to-read guides.
