After several years of minimal investment in cap-ex spending and property renovations, multifamily apartment operators and property managers are beginning en masse to pull the trigger on property improvements, with major value-add investments likely to also increase significantly in 2012 and 2013.
“I’ve never seen more painting, stucco, and asphalt jobs going on as there are right now,” said Dallas-based Riverstone Residential Group president Terry Danner, who spoke this week at the 2011 Multifamily Executive Conference on the panel "The Final Cut: Striking a Balance Between Cost Savings and Cap-Ex Investment." “I’d say 80 percent of the spending on cap-ex right now is on those types of defensive projects, and we think we’ll see continued defensive spending in 2012.”
Cap-ex is traditionally divided into two categories by the apartment industry: recurring and nonrecurring expenditures, often considered defensive and offensive spending, respectively, and are characterized by basic asset preservation versus return-focused projects intended to lift revenue. “Since the beginning of the recession, offensive spending has been minimal, but in 2011-12, most owners will begin spending, and will likely be spending in both buckets,” said Atlanta-based Gables Residential chief operating officer Sue Ansel, who joined Danner on the panel along with Ann Arbor, Mich.–based McKinley CEO Albert Berriz and Brad Cribbens, senior vice president of the Mountain/Southwest for Phoenix-based Alliance Residential.
According to Cribbens, Alliance is likely to begin funneling more capital into offensive value-add projects sooner rather than later as the firm boosts its overall cap-ex expenditures, which dipped from a $10 million line item in 2007 to $3.5 million in 2008 and just $1 million in 2009 before rebounding to $4 million in 2010 and 2011, with a return to $7 million likely over the next couple of years. “We’re moving much quicker back to a positive offensive look,” Cribbens said, “although with a bit more of a conservative outlook on ROI, where we are looking for a 15 percent to 17 percent return, compared with where we used to look for a 20 percent return [pre-recession].”
Ansel said Gables targets offensive opportunities in markets that have positive job growth expectations, positive absorption, and growing or recovering rents, and will likely focus its 2012 renovation spending in Houston, Austin, Dallas, South Florida, and Washington, D.C. “We want location and good bones, something that has appeal to future renters,” Ansel said. “We’re looking to see where rents are 10 percent or more below comp and/or interiors that are tired enough to provide a wow factor upon renovation to get the pop.”
For apartment firms considering kitchen upgrades, significant changes in finish expectations among Gen Y renters could mean the end of granite and stainless steel in market-rate and luxury communities. “Stainless steel is just not getting the lift, and granite seems to have lost its appeal, particularly to the Gen Y renter who is looking for something different,” Cribbens said. “Black-faced appliances are selling just as well now, as is soapstone and other, alternative solid and laminate surfacing.”