Apartment Extras: Generating ROI

Operators may not need to go beyond the standard amenity package to generate a return on investment.

Which amenities will “pack in the prospects” and ultimately make a real difference to the bottom line? For Paladin Realty Partners LLC, an apartment investor, amenities provide the “wow” factor that brings in apartment prospects.

“The challenge is to make the properties stand out. Like any retailer, you try to get the customer into the store. Once they come in, you want to make the sale,” says Bill Dunbar, managing director at Paladin Realty.

The common list of amenities, it seems, has become a standard requirement in Class A and Class B apartments in this day and age, and many of them may not necessarily generate extra rents or increase property value. However, because your competition has them, you’d better have them, too. Pools, fitness centers, recreation rooms and decks in urban properties may be the minimum amenities that all top-echelon apartments are required to offer.

“There are certain amenities that you have to have,” agrees Donald Davidoff, senior vice president of pricing and marketing for Holiday Retirement. “If you are targeting Gen Y with Class A and B products, you have to have a resort-style pool and well-appointed fitness center, which are de rigueur for Class A and Class B properties. If you do not have those items, renters will not pay the rents you are asking for.”

It is common in apartment repositionings—property transformations from Class C to Class B, for example—that extra value will be generated from adding amenities or improving upon existing ones. As Davidoff agrees, in an upgrade, “it will not be a Class B-plus property if there is no pool or if there are no new countertops, stoves and refrigerators, and nice landscaping around the pool.”

Paladin Realty, which specializes in investing in Class B and Class C properties, considers whether the investments in amenities will generate higher rents within a certain period of time. Dunbar agrees that operators today may be reluctant to spend capital in cases where the return on investment cannot be easily quantifiable.

“If rents are not manifested within a 24-month period, you have a problem—you may have miscalculated the depth of the market, or the ability of that market to pay for the improvements,” says Dunbar.

Paladin Realty sells on a higher apartment property value within a timeline of three to four years. This hold period may not be long enough to evaluate the payback of the added amenities, but the value of the undertaking is ascertained not so much by payback, but by the higher resale value.

Very often, changes to just the common amenities will be sufficient in bringing properties from Class C to Class B or even Class B-plus. Paladin Realty will make upgrades to the amenities to make possible rent increases, including going as far as replacing the entire clubhouse, if necessary. “Class B properties are always at a competitive disadvantage to newer properties,” says Dunbar. In one vintage-1970s property Paladin Realty purchased, for example, the company believed rents were suffering because of the absence of a clubhouse.

“The property had a very unimpressive leasing facility that looked temporary. Our plan was to tear it down and build a more traditional leasing center with a common area that included a workout facility and business center,” says Dunbar. Categorizing the project under cosmetic improvements, Dunbar says the work is not much different from building a single-family house and demonstrates to the residents that the new owner cares about them.

Sometimes, it is difficult to embark in a repositioning project and know for sure that you will obtain the rents that are expected, Dunbar observes. “The test is, if you get the rent that you want, you cost out. If not, you back off. Sometimes, you exceed your rent premium, sometimes not. You need to be nimble.”

Besides clubhouses, amenities can also consist of creature comforts in the units that do not cost a lot but make a big difference in paving the way for higher rents. For Paladin Realty, track lighting is one example of such in-unit extras, as well as 24-inch towel bars, towel rings and the use of two tones of paint. Certain amenities may be out-dated and may not be worth refurbishing. Dunbar says, for example, that racquetball courts, common in the 1980s, may no longer be so popular with residents. The company would replace these courts with golf simulators, yoga spaces or simply expanded exercise areas.

Stephen Peters, principal at Lee & Associates Investment Services Group Inc., an apartment advisor, agrees that pools, clubhouses and fitness centers are the minimum amenities to offer in any apartment community today. He adds that 55-plus seniors communities emphasize corporate engagement, while urban-infill properties catering to the younger set would stress a more intimate atmosphere in its common spaces.

Peters reminds apartment owners that amenities should be presented in such a manner as to generate the maximum use by residents. “The question to ask is how do you obtain greatest user experience out of the amenities that are there. Frequently the clubhouses are not used. If the clubhouse is not used, the only way you can compete in that market is by price,” he points out.

Efforts can be made to turn the clubhouse into a destination, he says. Insert a bar into the clubhouse, as opposed to having an empty rec room, he says. “Does it feel as though you are at a local bar or restaurant in terms of being in a community where people know you?” The end goal, says Peters, is to cultivate a sense of community so that residents are less inclined to move out.

Peters adds that more developers are also designing smaller and fewer units as a way to navigate the underemployment of the present economy. “The big push pre-recession was to offer bigger units and more amenities because developers were building to a higher entry level,” says Peters.

Post recession, the units may be smaller and the rents lower but the shared amenities more compelling. Instead of charging $1,400 rents for large units, quasi luxury finishes and amenities, the new rents may be $1,200 for units of smaller sizes. Developments are also emerging with fewer total units so that the properties cost less and will stabilize faster, Peters reports.

Apart from the standard package of offerings that every apartment community presents, does it generate ROI if property owners go “above and beyond” in their offerings? Intuitively, the answer seems to be “yes.” However, taking a contrarian view, Davidoff argues that such actions may not kick off higher rents in the long run. “If there is something the market demands that no one else has, it can be copied quickly,” Davidoff contends. For example, five years ago, many buildings did not offer WiFi. Today, Class A properties offer WiFi in at least the common areas, and it may be standard in all new developments as well.

Davidoff is skeptical that many as-of-yet novel amenities, such as pet parks or pet salons, would generate many extra dollars to the bottom line, per se. “I am a bit of a cynic, but you are not going to get $100 more in rent because [you offer these items],” says Davidoff.

According to Davidoff, operators are asking the wrong question when they ask, “what amenities will get me more rent dollars?” Don’t forget that amenities are only a part of the overall package, he advises. Not all extras on an amenities package list need to be checked. And remember, just because you have a movie theater does not mean you will be able to charge $25 more in rent. Says Davidoff: “You can have a property with a movie theater, and another without, and the one without [could] rent more because the sales team is better.”