By Jay Madary
To renovate or not to renovate? At some point for apartment owners, that is the question. And it’s a question they likely will confront with more frequency in the years ahead.
Demand for apartment living is set to spike over the next decade for a variety of reasons, according to a new study commissioned by the National Multifamily Housing Council (NMHC) and the National Apartment Association (NAA). To meet that growing demand, the industry will have to build 4.6 million new units by 2030.
Upgrading existing communities will be important too. More than half of the existing apartment stock was built before 1980, meaning 11.7 million units could need renovating over the next 13 years, the study notes. Despite the growing need for and the benefits of upgrading apartment communities, this is not a decision to enter into lightly. The components of a successful renovation are many and varied, and owners must be prepared to cross every “T” and dot every “I” to achieve their rent-growth goals. Below is a summary of some of the crucial steps to take.
Do your research
It is impossible to overstate the importance of thoroughly conducting your due diligence before launching a renovation.
Can your existing residents afford to pay more rent if they see the additional value you’re creating or are you going to have to repopulate most or all of the community? Can the surrounding submarket withstand your targeted rent growth or are you pricing yourself out of that area? And don’t just consider the present–determine if the rent growth is sustainable over the long-term.
Be ready to dive into reams of data and to do so with a gimlet eye. You simply can’t put $10,000 into a unit and not see a rent bump.
Find the sweet spot
It’s certainly possible to under- or over-improve an apartment community. You can’t just repaint 35-year-old cabinets, put stick-on tile on the floors and call it a day. That’s not going to lead to real, sustainable rent growth. On the other hand, you also can’t afford to gut a community down to the studs when the surrounding demographics won’t support the revenue growth you’ll need to justify such a large investment.
I’ve seen operators make both of these mistakes. Again, it all comes down to due diligence: What upgrades are going to produce satisfactory, sustainable returns over the long haul?
Be organized in your execution
When it’s time to actually undertake the renovation, organization is absolutely critical. A sloppy effort can hamper revenue by keeping units offline longer than necessary and can alienate residents.
For example, your community staff has to have an ironclad grip on when units are being vacated and thus are ready for renovation. The right materials and workers have to be on hand the moment the apartment home is ready for upgrades; every day that the unit is down means lost revenue and lost value to the community.
A disorganized process also can lead to inconsistency in the improvements. For instance, without thorough supervision, you might end up with one unit that has a granite countertop while another home with the same floorplan features a laminate countertop. Consistency is key to maximizing the value of a renovation.
Plan, plan and then plan some more
Additionally, it’s imperative to keep residents fully in the loop on the renovation project. Surprise disruptions to community life and failure to meet the announced schedule will only create discontent. Communicate early and often to your residents and lend a sympathetic ear to any frustrations they may voice. A new and improved property is all well and good, but its impact may be mitigated if the community’s online reputation is suddenly in tatters.
Finally, you have to have a well-thought-out marketing plan. Make renderings accessible to residents and prospects as soon as possible. Complete common-area improvements and renovate models before you begin aggressively promoting the revamped community. That way, you’re not selling the vision. Instead, you’re selling reality. Renovations can offer investors many benefits. Meaningful upgrades can enable a property to be competitive with new construction at a lower basis, or they can give a community a significant competitive advantage when surrounded by aging stock.
But owners can get too starry-eyed at the possibility of increased revenue and rush headlong into the process without thinking things through and putting a detailed plan in place. Only when they do those things will they get the returns they’re seeking.
Jay is the second-generation owner of JVM Realty Corp. and has been active in the business since 1997. His formal education is from Northern Illinois University where Jay earned a B.S. in Finance. However, he began his informal education very early on working “hands on” in the business alongside his father and also held various positions in the building industry, including U.S. Gypsum Co.