White Paper on Apartment Property Repositioning
- May 20, 2009
Creating New Value and Performance in Existing Multifamily Properties By Robert A. Koch, AIA Fugleberg KochThe aging process, in most income-producing real estate properties, is often reflected in slowly declining performance resulting from wear and tear and the evolving outdated condition of the property. In effect, many properties are on a continuously graduated, and declining, repositioning scale. This decline in asset condition can be slowed by effective management, combined with attentive property care, and interim investments that seek to protect the contemporary quality of the property. Occasionally the decline in value and performance is not mirrored by area conditions. The result can often be tired properties in improving locations. When this occurs, the potential for enhanced repositioning comes into play. The lessons of value adjustments become important to the revitalized performance of the property. The hospitality industry, under strong brand standards linked to franchise entitlements, addresses this condition with continuous review of property and operating standards obligated by the franchise agreement. Comparably, the housing industry, less mindful of applying evolving market standards to existing properties, usually seeks to moderate the rate of decline, but seldom to reverse it. Lessons from one industry to the other therefore provide some guidelines that can aid in the evaluation and implementation of potential repositioning opportunities.It should be noted that repositioning is more than refreshing, renewing, remodeling or renovating. While elements of each could find their way into a repositioning exercise, they largely focus on the physical issues alone and seldom consider the operating and performance consequences of such cosmetic endeavors. The most important judgment of a repositioning effort is identifying the desired shift in market placement to be achieved. As properties decline, the resident invitation moves to different consumer groups with different financial parameters. Well-repositioned properties create a fundamental shift in consumers to those more financially capable with needs and demands that may have not existed when the property was first constructed. The hospitality industry measures this evolution constantly and often requires the refreshing standards to be addressed in milestones as frequent as every three to seven years. As franchise licenses approach expiration, the requirements will often obligate substantial changes to protect the franchise agreement or to qualify for franchise alternatives. If the housing industry were to review and program a similar manner as part of a long-term ownership perspective, a similar strategy could also make sense. But rental housing investment and ownership seldom remains in place for the long term. As a result the long term is often measured in five to seven-year periods, at which time the potential sale of the asset becomes a priority.Effectively, this ownership shift thus becomes the milestone that triggers the core questions of property investment in either the asset as it exists, or the asset with adjustments that restart a new performance history. What follows is a brief overview of facility and design considerations when purchase and/or repositioning become an option. The evaluation and visioning of the property and its potential performance improvement is a team exercise that should blend finance, operations, facility/construction, and design. Together the ability to judge the best approach can be based on these considerations. The operating review is outside this white paper but central to the evaluation of choices to be made. Its consideration would validate or reject facility options and add independently new operating practices intended to mirror the upgrades in property and the elevated marketing goal.Location AssessmentFrequently when property acquisition teams visit a site for sale, they look at the product in context with locale, but seldom do they step back and ask, “What would I do with the land if it were vacant?”This rhetorical question provokes an independent judgment that often differs in conclusion from the separate question, “What potential exists for the property as is?” The rise or fall of adjacent areas can work with or against property value. When area demographics have evolved upward, the property may often find its performance ceiling limited by the product and not the site. In these instances the repositioning opportunity demands the influences of location be considered in the evaluation. Area amenity, prestige and potential resident profile could have shifted allowing for product and management decisions to be adjusted toward the clientele previously overlooked or discouraged from invitation.Quality area amenities could cause the internal amenity decisions to be modified in favor of features that do not compete but compliment the location premiums. If prestige has been advanced, the overall identity package for the community may need to be revisited. Other considerations related to safety, transit connectivity and employment venues can often play into the evaluation. Together, they lead the process to a core question as to whether the future resident differs from the current resident, and the ways that resident’s needs and desires could encourage change to the built and operated offering. Land use and zoning often change over time. They are an integral part of the land value. These changes may either constrict or enhance the site intensity or its capacity to be repositioned. Consider the regulations that may now apply and the process for increasing entitlements to new levels as a possible ingredient in property visioning. Selectively, certain communities may even offer incentives if they believe the repositioning will result in improved area valuations and tax contributions. Incentives together with higher densities and intensities may finance more aggressive options allowing for the future financial picture to dramatically change the outcome.Market Assessment Markets change over time. They may age or shift in educational and employment profile. The job markets may evolve, and the demands they place on housing may adjust accordingly. Market tastes and lifestyle expectations will find new paradigms. Expanded markets can allow for a more specialized target audience than was first envisioned. All of these influences could prompt fundamental change to basic product decisions in amenity and unit plan. Using the “clean sheet of paper” approach to the market potential should provide an idyllic idea of what the better solution would now be. Comparing that conclusion with the current product offering should inspire key ideas that would elevate the current product appeal at all levels.Market influence determines project identity, and amenity and unit features. This list thus becomes the program for design and construction forces to determine eligibility and cost appropriateness. When a large shift in repositioning is envisioned, it may dramatically impact the evolution through occupancy. The transition from a C property to an A property could require major work and a complete displacement of current occupancies in phases or in whole. The capacity to retain existing residents through the repositioning would need to be weighed. If the property already serves a quality of resident that could and would pay more if the property were to undertake a significant improvement, then the phasing sequence could prove to be a critical judgment. Allowing sequenced relocations within would insure limited negative impact on the current preferred resident while reducing the down time to operations and income.Property Assessment A property evaluation must begin with a physical examination of the condition of the overall asset, both visible and invisible. This inspection should seek to clearly identify the maintenance, repair, replacement, and reserve demands the asset requires. This financial investment stands independent of any remodeling, or repositioning vision that might follow. It alone considers
the curing or correcting of decay, contamination, wear, or code matters that can forever compromise the property performance.Some properties also communicate expectation based upon the visual presentation. Site plan layouts combined with building appearance can often date a property. If the fashion of that dated approach is no longer found appealing, that could require attempts at re-imaging the entire campus. Classic design solutions borrowing from historic influences can often transition well. Vernacular design solutions with little distinction can sometimes be appointed with features and accessories that reshape and re-image the property. Project styling that reflects momentary trends in architectural popularity can be the most difficult to revise, particularly if that style has lost its appeal and now is associated with shelter serving a lower market placement. While site layout is likely not able to be modified, the introduction of site improvements such as property gating, landscape, pavement accents, signage, lighting, and outdoor amenities can produce a major shift in the presentation and perception of the site plan approach.The common area and amenity package is often the easiest and most impactful area to consider. This part of the investment impacts all the residents within and offers an enhanced first impression as future residents visit the repositioned campus. Measured discretion must however be deployed to insure that the clubhouse and amenity don’t further the tired look and appeal of the dwellings within. Common area decisions must pace with some measure of unit enhancement (both external and internal) if a comprehensive repositioning is to result. Within the dwelling, the most crucial considerations often flow to kitchens and baths. Utility areas and storage adequacy often follow. The qualities of finishes in the remaining areas form the third area of focus. No single interior appointment costs more or creates greater impact than the kitchen. The appliances, and counter tops head that premium as they reflect the greatest wear and/or the newest trends. Cabinetry can many times be refreshed with simple appointments such as new hardware or cabinet face repair/refinish. If conditions allow, re-configuration of the kitchen to an island presentation can completely shift the total unit era to one of contemporary appeal.The bath, and specifically the master bath, follows on the kitchen’s heals as the next most critical zone to consider. Seldom can area or fixture placement vary, but the introduction of current accessories can update measurably the overall bathroom feel. Consider the following quick fixes to overhaul bathroom impression: -New vanity top with updated sink and plumbing hardware -Base vanity cabinetry with trundle drawer(s) -Supplemental shelving to further limited counter-top surface -Framed mirror in lieu of polished plate -Decorative vanity lighting fixtures -Refreshed wall surround at tub or shower (if wall treatment is dated) -New designer tile flooring (compatible with tub/shower surround if possible) Older properties may not have second bathrooms in multiple bedroom units or utility connections for washer/dryer. Both could be invasive to accommodate and costly to implement, limiting repositioning potential. The selective capacity to alter unit layouts to include such features might result in a shift in unit mix or a building appendage hosting the expanded capacity. Smart design and cost-managed effectiveness thus would be critical to considering the proper approach and implementing it.Flooring, door style, interior trim package, lighting hardware, and wall treatments all contribute to the contemporary appeal of a dwelling. These areas are easily addressed and can be approached in layers with more or less investments in certain units that result in varied price positions from a common base unit offering.Remember, décor is often reflective of target market tastes. Clubhouse interiors, model unit furnishings, and interior material finishes and colors are topical issues that by their nature must be changed periodically. The choices here are critical to affirming the perception of comfort and appropriateness to today’s prospect. As time moves on, these are easily changed and should always therefore be re-judged for their impact and assurance on the potential best new resident. Bonus space in the form of enclosed porches and captured attic volumes can sometimes be considered. In addition to more area under roof, they can provide flex space to meet evolved resident needs.Reposition Visioning The “what if” process of considering change must begin with target market objectives. Once market information suggests the product is a candidate for repositioning, the visioning exercise should generate as many enhancements or revisions that can be perceived as a check list of possible considerations. They should not only consider the physical elements but the management, marketing, and promotional components as well.Beyond the necessities of maintenance and replacement, the priority of importance can almost always be governed by the relationship of the idea with the property discovery. When fostering a strong first impression, -Street face becomes more important than interiors; -Arrival more important than details;-Common area more important than dwelling;This review, idea generation, and testing process should be done by the team that will design the new approach, implement the chosen execution and manage the results. In that way the choices best reflect a balanced approach to judgments and outcome. With visionary and collaborative personalities in each area, the vision can be multiplied as each builds off the ideas of the other. The selection of the visioning team therefore becomes a critical step in achieving superior results.SummaryIn a buyers market, the price of acquisition can many times be less than replacement. This lower basis may produce acceptable yields as is or with little upgrade. If however the condition of the property suggests further investment could unlock even greater performance, than the combined costs of acquisition and re-positioning become the budget to consider for a performance not evident at closing.Not every property ready for renewal is concurrently ready for repositioning. Renewal alone might be the best strategy to follow. Repositioning, when appropriate, should push the results to a new level. The most extreme version of repositioning is demolition and reconstruction of the new “best solution.” That effectively reduces the prior acquisition to a land transaction that values the purchase in terms of land, impact fee, salvageable infrastructure and vested entitlement, rather than vertical structures. The range between “paint up, clean up” and new build is the spectrum to consider. The steps therefore must bare financial justification in terms of investment and performance factors.“A sows ear can be made into a silk purse”, but at what cost? An attractive property becomes even more beautiful when market and repositioning judgments combine to forge the smartest option measured in terms of return. The best results therefore make the design and implementation an extension of a business strategy that asks, “How much better can it become in a visionary and financially responsible way?” Robert A. Koch, AIA is president of Fugleberg Koch, a design firm located in Winter Park, Fla. The firm specializes in architecture, planning, urban design and development consulting. Its residential portfolio represents a broad spectrum of the multifamily industry that includes mixed-use, urban infill, mid-rise, high-rise, direct entry, workforce housing and affordable housing projects. The firm says its visionary thinking, fundamental understanding of business demands, and market awareness of consumer needs and values has led to successful contributions in all sectors, earning Fugleberg Koch international placement among the industry’s top design firms.