Despite the general optimism in the multifamily industry, rehab still isn't penciling out. Modest improvements in occupancies and rents aren’t enough to push the rehab gates back open again, as every panelist on a renovation panel at the MFE Conference in Las Vegas last week pointed out.
The reason for this slowdown? Renters aren’t paying the excess costs for upgrades. “It’s great if you spend $5,000 or $8,000 per unit, but renters won’t pay for it,” said Durant Bell, principal and executive vice president for Greensboro, N.C.-based Bell Partners.
David Nischwitz, senior vice president and director of property redevelopment at Memphis-based Mid-America Apartment Communities was a good example of that trend. At the height of the market, the Memphis-based REIT was redeveloping 3,000 to 3,500 units a year (about eight percent of its portfolio). Now its doing about half that. And the amount of rehab its does per units fell off as well, moving from about $5,000 to $2,000 to upgrade the unit.
Nischwitz wasn’t alone. Lee Nguyen, a project manager for Irvine, Calif.-based The Bascom Group, said rehabs slowed in late 2009 and basically came to a halt in 2009. Jim Ledbetter, President and COO of Raleigh, NC-based Drucker & Falk, echoed this sentiment. “We’ve done very little rehab,” he said, joking that ceiling fans were basically the extent of the company’s upgrades.
Components of Rehab
When Mid-America does execute upgrades it will usually test 10 units or so to see if there’s traction in a market. During the downturn, the company has had success with things like flooring and Formica and, in some cases, kitchens, countertops, lighting and plumbing. In some markets, like Austin and Little Rock, the company had been successful.
Nguyen and Nischwitz both commented that they offered some upgrades with renewals when the market got very tight. For instance, Bascom would offer a free carpet or ceiling fan change with a renewal.
The panelists said the best investment, right now, is to wait. For instance, Mid-America hasn’t done some outdoor living upgrades, like pools and cabanas that it wants to eventually pursue. And Bascom is waiting to do some rehabs as well “We’ve held off on some upgrades, including utility retrofits,” Nguyen says.
But with this slowdown, apartment owners have seen some pricing advantages from their suppliers. Nguyen noted that Bascom got longer payments terms, while Nischwitz said that Mid-America was able to secure some architects that normally would be unaffordable. Ledbetter also saw some pricing advantages. “We rebid all of our contracts,” he said.
Brighter Days Ahead
Though rehabs have suffered in the past couple of years, there are better days ahead. With a number of Gen Yers in the pipeline and very little new construction (offering the ability to upgrade and not face a lot of brand new competition), rehabs could again become popular.
Before the meltdown in 2008, Bascom experimented with a number of features for Gen Yers, including iPod docks, upgraded fitness centers and pools, and converting empty space into things like WiFi lounges. Nguyen sees more of this type of thing becoming popular when rehab picks back up.
Bell thinks personalization will be a big driver for Gen Yers. That’s why he thinks things like accent wall and individual entertainment stations in workout centers will be huge “The key for Gen Yers is choice,” he says.
However, there is one major problem, at least right not. “They want all of these things for free,” Bell says.