When residents come into certain leasing offices for Mid-America Apartment Communities, they're not always sold on renewing their lease. To entice them, the Memphis, Tenn.-based REIT isn’t offering a few dollars off the rent or throwing in a DVD player upon renewal; it's offering an upgraded unit.

“During renewal conversation, we’ve begun to explore if [residents] would be interested in a new appliance and maybe new flooring,” says David Nischwitz, senior vice president and director of property redevelopment for Mid-America.

So far, Mid-America hasn’t rolled out the program, but it could potentially offer some advantages. There’s the opportunity to keep its redevelopment platform up and running, while also helping retain residents and limit turn costs. The renovations would occur in properties where rehabs are already occurring and would allow residents to stay in their unit throughout the process. The residents would have to pay for upgrades.

At first, Nischwitz thought that, in this economy, his residents would be resistant to any kind of price increase, but feedback indicated otherwise. “We’ve asked them if they’d be interested in this,” he says. “We’ve gotten good feedback that they would. In many cases, people have said they’ll be here longer than they thought [leading to increased number of renters interested in customizing their unit].”

Others aren’t so sure customers will pay more, regardless of the circumstance. When asked about renovations in general, Frank Apeseche, CEO of Berkshire Property Advisors, a multifamily owner in Boston, says, “If you are concerned about your job, the last thing you want to do is push your rent. The thing people don’t have a handle on is what’s going on with wages and salary. Until that confidence comes back, I don’t think you’ll have the consumer stepping up.”

Renovation Woes
Like most renovators, the number of units Mid-America is rehabbing has fallen off dramatically in the past year. After renovating about 3,800 units in 2008, the company will probably end up at around 1,500 to 1,700 units this year. The reason for the drop-off is simple. Mid-America was getting $100 to $115 more in monthly rent per renovated unit; now, it's getting $60 or $75 more a month.

As a result, when Mid-America does do renovations, they’re much smaller in scale (the company could spend more than $5,000 per unit). Instead of stainless steel appliances, it may go with basic white ones. Instead of granite countertops, it may choose Formica. These changes can both cut expenses and lower the rent premiums needed to justify the renovations.

“We’re focused on lighter renovations,” Nischwitz says. “The pricing point of digestible rent structure has been cut significantly over the last 18 months. We saw late last year that the lighter renovations seemed to be a little more digestible to our prospects.”

It’s a situation playing out throughout the country where most apartment renovators have scaled backs their operations or stopped them altogether. JRK Birchmont Advisors, a Los Angeles-based company with 38,000 units in 26 states, spends about $4,000 to get $100 in rent. In some properties, the rehabs take, and in others, they don’t. If it works, the firm may choose to expand the rehabs to the majority of a property, but it still won’t do a massive project in this environment.

“We try to stay flexible and fluid with our rehab process and only do what the market will absorb,” says Robert Lee, senior vice president of JRK. “We don’t do the type of rehabs you used to see. A lot of people would buy Class Cs at $20,000 per unit, and put in $10,000 to $15,000 a door, but that’s more risk than a construction project today can take.”