If Multifamily Executive had published a list of Top 25 renovators last year, the companies would have undoubtedly posted higher unit counts. Much like starts, transactions, and nearly every other measure of success, the number of rehabs nosedived in 2008—and the outlook doesn’t look any better for the second half of 2009.
Need proof? Look at AIMCO (No. 5). In 2008, the Denver-based REIT’s redevelopment spending totaled $242.6 million. In 2009, it expects that activity to plunge between $50 million and $75 million. AIMCO only is undertaking new projects when they meet higher return thresholds and are funded with incremental property debt supported by the value that the renovations will create. Similarly, Camden Property Trust (No. 10) recently completed a $45 million portfolio-wide rehab program, and this year has cut its spending dramatically with only two or three projects underway.
Private renovators also are slowing down. “People are pulling back on unit upgrades,” says Dave Woodward, CEO of Laramar Communities (No. 8), an owner, manager, and renovator based outside Denver. Laramar, which renovated 3,500 units in 2008, typically only rehabs if it can get a20 percent or five year return on investment. With rents falling, that’s getting increasingly more difficult. If Laramar puts $8,000 into a unit and can get a $150 a month rent increase, the firm makes a profit in less than four and a half years. However in this economy, $75 is more likely the attainable rent increase. That doubles the payback time.
Today, renters won’t pay for a $10,000 upgrade for new countertops, flooring, lighting, and washers and dryers. “We’re not seeing the rent spreads in today’s market,” Woodward says. “The mindset of everyone right now is they don’t care if the countertop is new. They just want a nice, clean apartment. They don’t care if the cabinet is new or not. They just want a clean unit. It is a different mindset than it was a year or two ago.”
Ric Campo agrees. “This isn’t a time to try to get higher rents on rehabs,” says Campo, Camden’s chairman and CEO. “Occupancy is good, but consumer sentiment is so negative that every person who walks in the door is very price sensitive, and you won’t be able to push rents. So, we’re definitely holding off our rehabs for better markets.”
With consumers refusing rent increases and investors now preferring distressed funds over value-added funds, Woodward thinks it may be a few years before the national rehab market returns.
“The economy will come back first,” he says. “I think there will be a lag time before people start having a comfort level where they really care about a higher-end product versus just having a nice, clean apartment.”
Berkshire Property Advisors (No. 2) In 2008, Boston-based Berkshire Property Advisors raised a $600 million discretionary fund, a milestone the company calls one of its greatest accomplishments of last year. It can use that dry powder to add to its 25,400 units across the country.
Berkshire says the $600 million fund should stretch further in ’09 than it would have a couple of years ago as prices for apartment assets go down around the country, creating plenty of acquisition opportunities.
Last year the company fared well, completing 30 rehabs that totaled approximately 7,500 units. What’s more, along with starting units in the South, it entered the Los Angeles market. Next on the company’s to-do list is maximizing net operating income; extending debt; developing distressed opportunity sources; and maintaining occupancy as unemployment rates continue to soar throughout the country. That’s more than enough to keep them busy.—Tanya Y. Coachman
National Church Residences (No. 23) National Church Residences (NCR) has some lofty goals for 2009. For one, the Columbus, Ohio-based firm wants to install remote deposit devices at all 300 of its communities. But even more impressive is NCR’s goal to reduce carbon emissions by 5 percent through a portfolio-wide green initiative.
The tough economic climate has cast a shadow on the company. Last year, NCR renovated 1,222 units; it projects only five such renovations this year. The firm, which owned 15,923 affordable units and managed 22,608 across the country last year, does not plan to enter any new markets in ’09.
Despite the down economy, NCR managed to attain an average occupancy of 98 percent portfolio-wide and an average portfolio occupancy above 95 percent throughout its Low Income Housing Tax Credit properties.
Last year, the firm also purchased a management company in a new market and launched InCare, a Medicare- and Medicaid-certified home health care agency serving Ohio seniors. The InCare product line offers affordable alternatives to skilled nursing and assisted living care.—Tanya Y. Coachman