In the never-ending pursuit to remain ahead of the competition—or at least on par with them—owners and operators are constantly considering community improvements. But with margins becoming increasingly tight in the multifamily market due to the elevated costs of materials, labor, and insurance, deciding which upgrades to implement requires a measured and highly strategic approach.
Yes, capital projects such as in-home renovations and new amenities generally help to attract and retain residents. Yet, more than ever, apartment companies must make certain that any upgrades pencil out from a value-proposition perspective.
With this in mind, several owners and operators share their thoughts about the types of capital improvements likely to prove effective in the current market—and those less likely to work—as well as their optimal processes for determining which upgrades to move forward with.
Don’t Overthink It: Concentrate on the Basics
“We’re going into a cycle where it’s really about getting back to the fundamentals,” says Tim Bruss, managing director of asset management for Hamilton Zanze, a San Francisco-based real estate investment firm that owns over 120 multifamily communities nationwide. “When doing so, it’s important to keep in mind that people mostly crave the basics, such as in-unit features and common-area amenities. Additionally, modern-day residents just want things to be easy. They want an easy process to tour properties, sign leases, pay rent, and submit maintenance requests.”
Hamilton Zanze, which teams with property management firm Mission Rock Residential to operate its portfolio, has built its proptech stack accordingly to help make the resident journey a seamless experience. Bruss notes renters especially want a clean outdoor environment, which could mean the addition of exterior community spaces such as barbecue areas and added features to existing courtyards and pool areas.
“Also, security is something residents are fairly vocal about because people first and foremost want a safe environment to live,” Bruss says. “Amenity-wise, that means LED night-lighting, installing cameras in most common areas, and making sure all fencing is secure and all gates are working properly.”
Part of concentrating on fundamentals is steering away from high-end upgrades that are least likely to deliver a strong return on investment (ROI), Bruss says, noting that residents craving state-of-the-art amenity spaces often opt for new builds anyway.
Creative Approach to Save on Materials
When Frank Roessler, CEO and co-founder of Ashcroft Capital, which owns apartment communities throughout the Sun Belt, looks at the current apartment landscape, he sees a soft market and an abundance of new supply coming online. In the hypercompetitive space, he knows the amenities Ashcroft offers are key components to attracting and retaining residents. But deciding which capital improvements to implement requires diligence.
“With regard to net operating income (NOI) and ROI, the standards of the past five years still hold true,” he says. “Focusing on your ROI is easy to do on the interiors compared to exteriors. With interiors, you know your costs and associated rent premiums. With the community amenities, it’s harder to gauge so you need to be very thoughtful.”
For interior upgrades, New York-based Ashcroft and property management subsidiary Birchstone Residential utilize an in-house procurement department to significantly save on material costs. The procurement department, SureHome, is an affiliated entity that buys renovation materials directly overseas, stores them in a centralized warehouse, and enables Ashcroft’s properties to purchase them at an extreme discount compared with anywhere else in the country. It has helped Ashcroft to continue renovating as markets have softened and has yielded a sizable competitive advantage, according to Roessler.
To Roessler’s point, it’s more difficult to measure the ROI quotient of exterior amenities, so Ashcroft concentrates on upgrades designed to forge connections with residents.
“Inter-resident connections are the largest driving factor in their decision to renew, so we like to offer them every reason to engage,” he says. “That connection can be enhanced by a robust clubhouse renovation, setting up co-working spaces and booths as more residents work from home, and other desirable community improvements—such as transforming dated tennis courts into something residents might actually use, like a multipurpose outdoor workout space.”
Ashcroft also implements platform services, such as dry cleaning, house cleaning, dog walking, and modern fitness centers that offer a full slate of services—including cardio, weightlifting, and rock climbing—so residents don’t have to get a separate health-club membership.
Know Your Community
While a cookie-cutter approach to capital improvements might appear to be the most efficient, certain upgrades can fall flat in particular markets. North Bethesda, Maryland–based CAPREIT, which owns and operates communities throughout the United States, is among the operators that allow the geographic location of the community to help set the road map. For instance, the company’s CityView community in Nashville features a new multipurpose courtyard that overlooks Nissan Stadium, home of the NFL’s Tennessee Titans.
“In our Sun Belt communities, exterior amenity improvements such as artificial turf recreational areas, rooftop decks, and spatial recreation really drive ROI,” says Chris Pilato, chief development and construction officer for CAPREIT. “At our colder communities, interior amenities such as fitness, sports simulation, and dog washing areas still seem to drive the greatest ROI.”
Pilato notes in-home improvements are just as important as common-area upgrades in the pursuit to achieve a strong ROI.
“You need to keep updating your in-unit specs and finishes annually so they are up to date in the market you are operating in,” he says. “This can be as simple as upgrading a mirror, cabinet hardware, countertop selection, or other minor items. The upgrades also need to be classic, timeless selections to avoid following anything too transitional.”
Pilato and CAPREIT also have discovered that upgrades involving smart solutions produce strong returns due to residents’ desire for technology. These include items such as smart locks and entry systems, smart thermostats, leak detection systems, and communitywide high-speed internet.
Words of Wisdom
When sharing potential best practices for the capital improvement process, the operators agree on a handful of key points—know your demographics, don’t over-renovate, don’t try to turn a community into something that it isn’t, and don’t be shy to observe your competitors.
Bruss recently toured 18 different Hamilton Zanze properties in various markets across the country, which drove home the idea to treat each as its own entity when considering upgrades.
“Each community has its own personality, and that personality is made up by the residents,” he says. “They make that community. Some just want a nice clean, safe community that’s cost-effective. Others want more of an immersive experience. Make investment decisions based upon what you’re seeing. Don’t put a 50,000-square-foot fitness center in a 1970s product. And at the same time, don’t rip out the countertops if they’re functional.”
Roessler concurs, saying: “A cramped studio is what it is—crown molding or quartz countertops won’t change the idea that it’s small. Same with a 50-year-old community. You can’t wave a magic wand and turn it into a 2024 build. Know the product well, and add an appropriate amount of improvements.”
Ashcroft tends “not to offer the amenities of yesterday,” such as classic business centers, theater rooms, and outdated sports courts, Roessler says. The company instead will repurpose those spaces after purchasing a property. For instance, an old business center can be converted to a Starbucks/Apple store-type environment, a theater can be transformed into a WeWork-style space, and a tennis court into a pickleball area.
Monitoring your comps should never be frowned upon, the operators agree. After all, you cannot trademark something like a dog park.
“First, we look at our immediate comp set to see what amenities and improvements they are currently offering their residents,” Pilato says of CAPREIT’s approach. “Next, we communicate with our residents and ask them what they currently like at the community and what they think is missing. In our communication, we typically identify specific items that were planned in our budget to confirm if there is indeed a desire for these items. Based on those communications, we will decide whether we proceed with an anticipated project or pivot to another project.”
When it comes to capital improvements, today’s multifamily landscape has presented a fair share of challenges. It has also made them more crucial than ever. Operators have proven to be resilient, however, and many, including the leaders above, have modified their approaches to remain competitive in the current environment.
