Last year, Irvine, Calif.-based The Bascom Group paced the inaugural MFE Top 25 Renovators list with 13,081 units renovated in 2008. This year’s No. 1 firm clocked in less than half of that number of renovations: Irvine, Calif.-based Western National Group renovated a mere 7,042 units in 2009.
Scroll down the list and the dramatic drops continue throughout for both REITs and private, regional firms. Last year’s second place renovator, Boston-based Berkshire Property Advisors, renovated 7,500 units. This year’s No. 2 spot went to Dallas-based Lincoln Property Co., which renovated just 3,200 units. Last year, Denver-based Archstone ranked No. 3 with 5,808 rehabs. This year, the third spot goes to Greensboro, N.C.-based Bell Partners with 2,835 units. As for the last spot on the list? Plymouth, Minn.-based Dominium Development and Acquisition landed the No. 25 ranking last year with 1,044 units. This year, Arlington, Va.-based Clark Builders Group rounds out the list with a meager 470 units.
Just like their brethren in multifamily development, multifamily renovators undoubtedly had a rough year. First off, a lack of available financing and a glacial acquisition pace prevented renovators from buying properties. Second, an inability to get rent boosts from rehabs at currently owned properties forced operators to dramatically reduce the numbers of units renovated and scale back on the renovation packages. In short, it was extremely challenging for owners to make any money on upgrades.
Memphis-based Mid-America Apartment Communities, for instance, typically achieves rent increases in the $70 or $80 range for kitchen and bath facelifts, among other upgrades. But lately the REIT, which landed the No. 6 spot with 2,019 units renovated in 2009, has been collecting closer to a $50 or $60 rent increase per unit.
Indeed, falling rents and less demand for upgraded units caused many renovators to shift focus last year. “In 2009, our focus was on keeping the existing inventory at the price that it needed to be,” says Joe Mullen, president of Philadelphia-based Madison Apartment Group, which completed 2,639 units for the fourth spot on the list. “And then [we focused on] doing any upgrades, making sure we weren’t doing too many and that there was still demand. At the end of the day, people are more concerned with what they’re going to be paying for rent. They’ll forego the [new] cabinets and countertops as long as they are living in a clean and well-run community.”
Those apartment owners brave enough to renovate often scaled back the rehab work. For instance, owners renovated kitchens instead of both kitchens and baths or re-faced cabinets instead of replacing the entire units. However once renovation work begins, it’s often hard to limit the scope of work. “You could say you might upgrade the counter [in a kitchen], but what if the cabinet is 20 years old?” asks David Nischwitz, Mid-America’s senior vice president and director of property redevelopment. “If you’re going to do one thing, you have to do the other.”
And, sometimes, regardless of achievable rent upticks, an owner has no choice but to renovate. “There are certainly instances where we do the work because the condition of the apartment is not something that we’re going to rent,” says Keith Knight, vice president of capital improvements and national accounts for Rochester, N.Y.-based Home Properties, a REIT that completed 2,128 rehabs in 2009, landing it the No. 5 spot.
If a firm did have to renovate in 2009, there was one advantage—lower pricing for products and materials. “The contractors we are working with are more price sensitize [than in the past],” Nischwitz says. “They’ve sharpened their pencils a bit more because more [construction] companies are coming at us willing to compete on labor.”