Renovating Apartment Units to Stay Competitive

Though the rehab market has slowed, renovating now can put you ahead of the competition.

When the units are looking a little shabby and need some sprucing up, “who ya gonna call?” Companies that specialize in apartment rehabilitation, of course! These experts are in business to upgrade units that might be outdated, in an effort to entice potential residents, increase rents or provide an additional income stream.

“A lot of apartment communities are in nice areas, but with new developments going up, the older building needs to bring in the newer products to compete in the marketplace,” says Christian Gagliardi, assistant vice president of operations for Paramount Services Inc., a company that works exclusively on renovations of kitchens and baths for multifamily units.

These companies work through third-party management firms, REITs, private equity funds, banks, developers and government entities. “Banks bring in a third-party management company to take over the property while it’s still in receivership, and we do the necessary repairs to make it more marketable,” says John Jordan, vice president of construction at J4 Development. “When we work with banks, we focus on life-safety issues and trip hazards—all the things that basically would deem the property unsafe.”

Another large part of J4 Development’s market is student housing. “At the end of each semester, students will move out and others come in,” says Jordan. “We make ready the unit, replacing countertops and floor coverings.”

While most of the rehab work is done when the residents are still occupying the space, these companies also work with new developers. “An owner might be buying a B property and is making it a B-plus with a few new kitchens and baths to give them a nicer product,” Gagliardi points out.

Struggling market

Larry Burnett, national redevelopment specialist of Renovations Plus, remembers when only a few years ago he was traveling all over the country and putting together proposals for clients. Today, the lagging economy has hit the rehab market, too.

“Since about the third quarter of 2008, it has slowed down, especially on upgrades,” he says. “[Clients] won’t even replace a wall plate; before it was automatic. I also believe the management companies that are continuing to renovate their properties through these times will benefit the most once things turn around. They will already have the renovated product in the market and will be ahead of their competition.”

Last year was tougher than previous years for Paramount Services, says Gagliardi, but he adds, “We held our own.” The good news is that a turnaround is expected soon.

“This year, we have companies asking us to give pricing, so it seems they are getting ready to start projects in 2011,” he says. “I definitely see that next year is going to be better.”

Gagliardi also says that business is picking up, but the difference is that now clients are comparison-pricing. “Price wasn’t so important a few years ago,” he says. “Everybody is shopping around now.”

“What we’ve seen slow down are the want-tos, not the need-tos,” adds Jordan, who also says that some of his markets in Colorado haven’t been hurt by the economy, but other slower markets, like California, for example, are holding back. “Anything that needs to be done is done, but any upgrades, like new fencing or a basketball court, are put on the back burner until the market turns around.”

While it might make sense to invest in a property, the goal to increase occupancy and rents may not work in every market, which is another possible explanation for a slow industry. “When they renovate a unit, the complex will charge extra for that renovated unit, say $150 per month, but in a down economy, the tenants don’t want to spend the extra money per month for the upgrades,” says Burnett. “With the [down] economy, the people who are renting the units would rather have the older unit and less monthly rent than pay a little more.”

However, by increasing rents, management can possibly attract a different level of renter. The bottom line is that the property that looks the best and is in the best condition is going to get the most foot traffic, says Jordan. “It behooves the owners to keep properties in tip-top condition.”

If you haven’t tried to rehab a property, Gagliardi suggests testing the waters by doing only a few units first to see what kind of return you can get.

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