As luxury apartment towers continue to reshape skylines across the country, existing rental communities—some several decades old—are getting a new lease on life through renovations designed to appeal to more cost-conscious renters.
Investing in and upgrading old properties in prime locations has proven to be a successful formula for a number of Chicago-based companies, including Draper and Kramer, Kass Management Services, Evergreen Real Estate Group, and The Habitat Co. Below, executives from each firm weigh in on the best practices for adding value to existing buildings small and large, market-rate and affordable:
MFE: What makes a building an ideal candidate for value-add?
Mark Durakovic, principal at Kass Management Services: Older, well-located buildings developed at least 15 years ago and close to public transportation are typically the best candidates for value-add. Buildings of all sizes can have these characteristics. There are usually other property- or market-specific factors that come into play as well.
Derrick Hawthorne, vice president of asset management and acquisitions at Draper and Kramer: The best value-add opportunities are in rising markets where values in general are increasing. A particular property is a good candidate if it’s somehow lagging that growth—either operationally or with a physical deficiency such as amenities or unit finishes not being up to par with the market. The combination of those factors is ideal for value creation.
MFE: What’s more important: amenity upgrades or in-unit improvements? Where do you typically start for each?
Steve Rappin, president of Evergreen Real Estate Group: Both are important; however, the best starting point is typically in-unit upgrades. They improve the everyday living conditions of our residents, increasing their overall satisfaction and the probability they’ll renew.
Bryan Sullivan, vice president of acquisitions and investment at The Habitat Co.: While amenity packages continue to dramatically exceed historical standards, we believe in-unit renovations—whether for mixed-income or market-rate developments—ultimately provide the greatest return in the form of tenant satisfaction and return on cost.
MFE: Are there differences in your approach to value-add based on geographic region?
Hawthorne: We absolutely see regional shifts in renter preferences, which shapes our approach in different markets and even submarkets. In parts of the Southeast, for example, rental properties typically have hookups for in-unit washers and dryers, but not the actual appliances, which is different from Chicago. For that reason, we don’t spend money on adding in-unit laundry in those markets, because renters don’t expect it.
Sullivan: There are very different baseline expectations from market to market. Some regions are much more price-sensitive and you need to be very careful about overimproving, because the tenants won’t pay the premiums. Tenants in one market might expect high-end appliances while other markets are hyperfocused on new flooring.
MFE: Which renovations bring the best ROI? the worst?
Hawthorne: The best ROI comes from renovations residents can directly appreciate. We’ve never lost money on updates that improve curb appeal or enhance amenities like a community clubhouse. The worst renovations from an ROI standpoint are maintenance issues due to neglect by previous ownership—things you have to do for value preservation rather than value creation.
Rappin: We always ask ourselves whether an improvement will directly impact our ability to rent an apartment. Kitchens—including cabinetry, countertops, and appliances—and bathrooms are often a starting point, as they’re what prospective tenants notice first. We also see strong ROI through less-visible, mechanical upgrades, such as new HVAC equipment, windows, and lighting systems, which can generate long-term savings through increased efficiency. In some cases, renovations are more need-based, and while they may not offer significant ROI, they’re still important to the everyday function of the community.
MFE: How do you measure ROI in value-add buildings?
Durakovic: The goal is always to increase rents and occupancy, which will ultimately increase the value of the underlying real estate. How, specifically, that’s achieved and measured often depends on the broader investment strategy. Owners looking to renovate and sell will have very different priorities from owners with a longer-term outlook, who tend to make improvements over time—often as units become available.
Sullivan: Not all value-add strategies are empirically measurable, as different improvements can assist in areas like resident retention. Typically, ROI is calculated by achieving a certain increase in rents through programs like unit renovations or by reducing expenses through modernizing.
MFE: What are some creative ways you’ve added value to a property?
Durakovic: When undertaking a rehab, we not only update units and common areas, but also identify spaces that are underutilized in their current state. In smaller communities, we’ve successfully converted spaces such as basements and storage closets into gyms and resident lounges, creating amenities where none previously existed. Outdoor courtyards are another addition that can have big ROI.
In order to further enhance the residential experience, we often partner with third-party vendors to offer services like package delivery and off-site storage. Additionally, we work with outside service providers to host fun, engaging events for residents, such as fitness training, wellness coaching, and massage therapy.
Hawthorne: One of the best ways Draper and Kramer adds value is through our firm’s experience. Because we’ve been around for nearly 125 years, we’ve done it all. After you go through a project once, there are a lot of things you wouldn’t do the same way again. The ability to foresee issues before they happen and price and budget accordingly is invaluable in this industry. An example of this is being able to predict resident retention during a renovation, based on current resident profiles.
MFE: How do you communicate improvement plans to existing residents?
Durakovic: As a property management firm, we find the best way to communicate with residents is, first, face-to-face and, then, follow it up with a written communication. Through our resident portal, we’re able to stay connected and communicate with residents in real time on their platform of choice, be it their computer, tablet, or smartphone. While keeping residents informed about upcoming construction projects is key, we also try to involve them in the decision-making process by sending out surveys to determine which improvements they find most compelling.
Rappin: We try to be as transparent as possible with our residents. Typically, we’ll send a letter with a brief explanation of what our goal is and then schedule a meeting where we discuss the project in detail. When the work commences, we post daily updates/schedules in the common areas of the building, so residents know what’s going on at all times.
MFE: What are the biggest challenges you face when implementing a capital improvement program? How do you overcome them?
Hawthorne: A full capital improvement plan might have 10 to 15 individual projects, each with its own hiccups. The biggest challenge—and the key to success—is coordinating that work with property management so there’s as little disruption as possible to day-to-day operations.
Rappin: It depends on what the capital improvement program involves, but, typically, the biggest challenges arise when you’re working in occupied units. Oftentimes, residents have to be temporarily displaced and their belongings moved while the work is done. Overcoming this boils down to communication and preparation. When the resident knows what’s being done to their unit and how we’re planning to achieve it, they’re much more willing to work with us. We try to coordinate the work down to the hour and stick as close to that schedule as possible.