Keep People and Projects on Track

Managing multifamily renovation projects is like trying to rub your head and chew gum at the same time. Apartment owners and managers not only have to handle construction and renovation work and keep things on schedule; they also have to juggle residents while they're at it.

It takes smart planning from the start. The first task? Calculate your expected resident turnover during the renovation. "You need to keep occupancy such to allow enough units for workers to keep busy in a smooth way and keep occupancy high enough to meet your leasing goals," says Steve Heimler, founder and CEO of Stratus Real Estate, a third-party manager in Woodland Hills, Calif., that oversees roughly 19,000 units.

Ralph Kelliher

To do that, a renovator has to figure how many residents he expects will leave of their own volition at the start of a project, when leases are up for others, and how many new renters he expects, then budget accordingly. Because most renovations, or at least renovations significant enough to cause disruption, require owners to increase rent to deliver decent returns, many existing residents leave. "People are used to seeing a certain dollar rent on their building," says Philip Shuster, a 25-year veteran of the Southern California multifamily market and president of Shuster Properties, which renovates, sells, and owns properties. The company currently owns 700 units.

Of course, in some cases, that's desirable, if owners are trying to completely change the renter profile. The trick is to know what is to expect and plan for it. Shuster, whose company focuses exclusively on renovation, tracks turnover rates at all his projects to get a sense of average turnover rates in a specific submarket. Then he goes a step further and considers a building's resident profile. What he has found is that turnover is slower in buildings with lower-income residents because they can't afford to move while higher-end properties turn over more quickly during a renovation because those residents have the financial ability to move. "People are used to seeing a certain dollar rent on their building," Shuster says. "They are going to be blown away by the rent you're asking."

Resident Relations

Typically, only a small percentage of residents elect to remain in their apartments during renovations, but that figure is growing, at least in a hot market like Southern California, says Steven Ludwig, principal of Coastline Capital Partners, an investment firm that owns 1,200 apartment units in Southern California. "Oftentimes, because so many buildings in Southern California are out-of-date and have so much deferred maintenance, tenants often appreciate what we're doing."

Keeping these existing residents happy through a renovation project takes communication and consideration, renovators say. Property managers need to be upfront and open about what's happening and what will occur next. "In our leasing office, we have poster boards depicting the transition," says Ludwig. "Existing residents get excited about living in a new community, about new carpets, paint, fixtures, and new bathrooms." To minimize disruption, Ludwig's firm tries to complete the project as fast as possible while keeping the work as unobtrusive as it can.

When it comes time to remodel individual apartments, Ludwig's managers move those residents who are staying at the property during the renovation into the newly updated units. (Many renters don't care about keeping the same apartment as they have been leasing, Ludwig says; they are more excited about the improvements happening at the property. When residents do want the same apartment post-renovation, management temporarily transfers them into a rent-ready unit while their unit is being refurbished.)

Rent-controlled buildings require a different strategy. In Los Angeles, where properties are "de-controlled" when they become vacant, property management companies deploy a variety of tactics to turn over residents. "We catch them on late payments or violating rules, and use that as a basis for eviction," says Heimler. When no other strategy works, Stratus buys residents out of their leases. "At a certain dollar figure, they'll hand over the keys," Heimler says, whose company once paid a resident more than $20,000 to buy out his lease. "The units were $1,000 below market. It made sense for us to pay a lot to get that apartment."

Marketing Strategies

Marketing properties under renovation require forethought, too, beginning with pricing. In the first stage of construction, when the flags are out, lawns torn up, and rubble piled in front, apartment owners and managers must be aggressive with their marketing and sales approach. Strategies include lots of print and online advertising, "early move-in" discounts on rent, and more. In addition to ads in local newspapers and the Internet, Heimler's firm also puts up extensive signage and deploys a manager with great salesmanship skills.

Ralph Kelliher

Midway through the project, once prospective renters can observe the differences between the old and updated parts of the property, Stratus will raise asking rents, but that's it for rent hikes until the renovation is nearly done. By then, the marketing required is minimal and the rents are set at the property's targeted figures. "Once they can see the common areas and remodeled units, the product sells itself," says Heimler.

Sometimes achieving those significantly higher post-renovation rents may seem impossible, but experienced apartment renovators know better. "It's half art and half science," Shuster says. "It's the art part that a lot of people don't get. And that's where you make your money."

He offers the example of one Los Angeles project, located near the now-hip intersection of Fairfax and Beverly avenues, where he set such a high target for new rents that his lenders and property managers panicked. In the early months, leasing can be slow, and Shuster's worried colleagues insisted on dropping rents at the property. But that didn't work either. "They got a lot of tenants in, but we couldn't meet our goals," Shuster says.

So Shuster went the opposite direction, boosting rents just slightly at the property, with no resulting slowdown in leasing activity. He raised them again when the renovation was nearly complete, hitting the original figures that so troubled his associates–plus another $100. To the shock of Shuster's colleagues, the property soon achieved 96-plus percent occupancy at rents far higher than had ever been paid in that neighborhood.

–Nichola Zaklan is a freelance writer in Portland, Ore.