Calculating risk and reward for any renovation must take into account broader market forces and demographics.
Property owners must balance their ambition to attract a better class of tenant with their trepidation that an extensive upgrade could overshoot what a market will bear in higher rents.
“We’ve made the mistake in thinking improvements that [individually] boost rents by $50 would, if done together, increase rents by $150. They don’t,” says Jerry Davis, COO of Colorado-based UDR.. “If you blow through the [rent] ceiling of what a submarket will take, you’re not going to get the cumulative return.”
As a hedge, it’s not uncommon for owners to upgrade a handful of apartments at a time, see what those improvements yield in terms of tenant satisfaction and higher rents, and make adjustments accordingly.
“Our onsite people are tracking this on a daily basis, and if we see something that isn’t working, we’ll change it,” says Wes Fuller, executive director of Charleston, S.C.-based Greystar.
Crowdsourcing Rehab Ideas
Several companies also solicit input from tenants and prospects about what changes they’d like to see made to their buildings. McKinley asks tenants through its resident community portal, called MyMcKinley, about renovations and upgrades they’d be willing to pay a rent premium for, says the company's CEO Albert Berriz.
At its Bell Preston View property in Raleigh, N.C., Bell Partners found that residents wanted a higher-end package “and could afford it,” says Erin Ditto, senior vice president of asset management for North Carolina-based Bell Partners. During the renovation and repositioning of that building, the turnover was only 45 percent, she says.
Gables Residential surveys residents prior to a renovation, and uses research firm Kingsley Associates to gauge prospects’ needs. But the company says the information gleaned is more likely to confirm, rather than alter, Gables’ renovation plans.
Indeed, there are limits to what property owners will do to meet tenant demand. says Forrest White, director of asset engineering for Phoenix-based Alliance Residential, notes that while tenant surveys give his company “a global perspective on what’s working in a lot of our places,” they’re less effective in identifying demand within individual properties.
“A lot of tenants request dog parks and running areas, but that’s not as impactful as you’d think” on generating rent increases," White explains, because those amenities may not be as important to the majority of tenants in a particular building.
Most tenants, say owners, also clamor for apartments that can accommodate the electronic devices that have become part of their daily lives. And the presence of USB ports and WiFi-friendly common areas can enhance a building’s image. But owners still question the ROI value of adding technology that changes so rapidly. Several years ago, UDR learned this lesson when it installed 42-inch flatscreen TVs into all of its remodeled apartments.
“We were getting a $50 [rent increase] on a $1,200 investment,” recalls Davis. But as bigger screens became popular, tenants’ expectations changed and those rent gains evaporated.
Diane Batayeh, COO of Village Green, thinks property owners put too much emphasis on upgrading apartments. Her company’s goal, she says, is for its buildings to match the quality of competitors’ interiors, and exceed their exteriors.
Other property owners agree that achieving ROI objections often begins with what Fuller calls a “holistic approach” to renovations that allows buildings to make a stronger first impression.
“Curb appeal is one of those things that never die,” says Alliance's White. “It translates into the experience of living there.”
Half of what Ann Arbor, Mich.-based McKinley spends in offensive renovation capital goes towards “resetting the image of the property,” says Berriz, by upgrading signage, landscaping, and concrete work around the premises.
Carroll Organization’s No. 1 renovation, in terms of increasing rents, is upgrading the appearance of its buildings. “When someone walks through the front door, we want to present the expectation of higher rents,” says Linda Masterson, Carroll's vice president of property management.
At its Bell Preston View property in Raleigh, N.C., Bell Partners found that residents wanted a higher-end package “and could afford it,” says Ditto. During the renovation and repositioning of that building, the turnover was only 45 percent, she says.
Carroll Organization renovates buildings with an eye toward retaining at least half of their tenant base, says Masterson.
Bascom’s renovation scheme usually includes “a pretty thorough landscaping” with impact lighting, says Paul Zakhary, the company's director of portfolio. Many of its buildings have common gardens and vegetation areas. Bascom also tries to impress tenants and prospects with amenities that other apartment buildings might not have, like splash and water parks, “which people go completely nuts for when they see them”; outdoor kitchens, and even cabanas.
Younger renters, say property owners, are demanding amenities like fitness centers, computer and business centers, and common areas where they can congregate, socialize and even work.
The importance of common spaces to a building’s ability to lure tenants and generate higher rents hit home recently for Gables Residential at its property in Washington D.C.’s Dupont Circle. The company finished the interior renovations last year, but was slower to improve the common spaces.
“Initially, we weren’t doing as well as we hoped for,” recalls Cris Sullivan about that building’s occupancy rate and rents. But that all changed once the common areas—especially the lobby—were done. “This was a real ‘a ha’ for us,” she says.
John Caulfield is a contributing editor for Multifamily Executive.