Apartment Renovation Drives Rent Growth

When it comes to value-added renovations, developers face myriad choices: You have only so much money to spend but a million different ways to spend it.

But in many ways, renovations are all about matching the competition—to a point.

“You need to look at the new generation of product and what they are developing and delivering,” says Wes Fuller, executive director of investment at Charleston, S.C.–based Greystar Real Estate Partners, which plans to spend roughly $200 million to renovate 15,000 units in the next three years. “We can’t do the same, but we can do similar materials, similar looks, and similar colors. These renters want the look of the new product but can’t afford it.”

To capture those residents, smart renovators are concentrating on a handful of updates with impact: stainless steel appliances, fresh color schemes, rejuvenated kitchens, and distinctive common spaces like an outdoor kitchen, indoor pool, or resident lounge, according to the results of our fourth annual Apartment Renovation Index (ARI) survey.

“We focus on creating memorable social spaces both indoors and outdoors,” says Emily Moore-­Pleasant, an asset manager with Greensboro, N.C.–based Bell Partners, which expects to renovate 3,100 units this year. “We could spend our budget doing a fair job enhancing all areas of a property, or we could focus on doing something really well and memorable where a prospect walks away thinking, ‘Wow!’ We generally go for the ‘wow’ factor.”

We’ve highlighted a number of these strategic decisions in the pages that follow, focusing on a few properties, from affordable to upscale, that found new life not by abrupt changes in direction, but by subtler shifts that still deliver big returns on investment.

“In most of our markets, it’s generally possible to raise rents by $15 to $75 per month, depending on the scope of the interior renovation,” Moore-Pleasant says. “To raise rents by $100 or $300 will generally involve more risk and a resident demographic reposition; major overhaul or gutting of spaces; or a rare opportunity to capitalize on a severely undermanaged property in a highly desirable and improving location by bringing rents to market level without renovations.”

With rent growth projected to soften in 2013, many firms aren’t interested in that level of risk. “Our approach is to renovate while maintaining a high level of occupancy,” says Fuller. “Some projects may require a lease-down, but we rarely invest in those … . We like our investments to maintain cash flow and pricing power.”

The Situation: Built in 1969 in suburban Cleveland, the 236-unit Hummingbird Pointe was a solid performer for Forest City Enterprises, which built, owns, and manages the 10-story property. But the building’s future was unclear. “It wasn’t a run-down and horrible property. It wasn’t a horrible business,” explains David Conway, vice president of asset management at Forest City. “There was just no growth. We had an aging building in a non-growth market, so we asked ourselves, ‘What can we do to reposition the asset?’”

The Decision: Drawing on his background working in upscale senior living, Conway thought Hummingbird Pointe offered the chance to serve a new market: value-oriented seniors living in suburban Cleveland. “Resort-style properties are great for seniors who can afford $4,000 to $10,000 a month, but what about the average person?” asks Conway, who spent $6 million and about 15 months to renovate Hummingbird Pointe with more senior-friendly features, amenities, and services. Inside the units, zero-entry shower stalls replaced bathtubs. A new, 14,500-square-foot amenity center hosts a fitness center with weights and cardio machines, a beauty salon, and an indoor swimming pool. “We did it partly to differentiate Hummingbird Pointe from the market, but it’s also a huge plus for people who like to swim,” Conway says. He also arranged a partnership with a local home health care company, which sends a nurse daily to the property during the week to do blood pressure checks, encourage wellness activities, and answer questions from residents of all ages, from octogenarians to young mothers. (While 40 percent of the building is occupied by residents who are 55 or older, Hummingbird Pointe is not age restricted.)

The Result: Both rents and occupancy rates have risen at the formerly stagnant community, whose offerings now attract both health-­oriented retirees and amenity-hungry 30-somethings. And the competition has taken notice: Conway has fielded a number of inquiries about the property and its makeover from developers around the country.

The Situation: This 312-unit property, formerly known as Las Flores, joined the Greystar Real Estate Partners portfolio in 2012, when the South Carolina firm picked it up in a four-property deal. “We liked it because of its location. It’s a wonderful submarket with a high quality of life, high employment, students, and a lot of biotech exposure,” says Wes Fuller, Greystar’s executive director of investment. But the 1980s-era property in San Diego County was more tired than wired.

The Decision: Greystar, which renovated 1,700 units in 2012 and plans to do another 5,000 this year, began with the basics: painting the exterior, changing the name, and upgrading the landscaping, especially where the newly rechristened Avana La Jolla backs up to a local greenway. Greystar also refreshed the common areas on the inside and outside, redecking the pool, building an outdoor kitchen, buying new machines for the fitness center, and reconfiguring the clubhouse with a new, more open plan that includes a wireless café. “We wanted to modernize the clubhouse in its form and function,” Fuller says. Lastly, Greystar also gave individual units their own face-lifts, installing new appliances, cabinets, countertops, flooring, and bathrooms. “New appliances have a huge impact, and because we manage so many units and purchase so many products for renovation and new construction, there are huge economies of scale, and we are able to get pricing that is very competitive,” Fuller says.

The Result: Avana’s occupancy rate has climbed four percentage points, to 97 percent, despite the hassle of renovations for residents. Rents have climbed by $200 per unit, and the median income of those residents has also gone up, according to Fuller.

The Situation: Unlike many of the other properties featured in this year’s ARI report, Renaissance Apartments does not stand alone; it belongs to a multimillion-dollar effort to revitalize the economically challenged South Side Chicago neighborhood of Woodlawn. The effort is being led by Preservation of Affordable Housing (POAH), a Boston-based nonprofit that is creating mixed-income neighborhoods through developing new and rehabbing existing rental properties. ­Renaissance, built in the 1920s with a mix of one-, two-, three-, and four-bedroom units, qualified for rehab. “It had been an affordable property that was owned by Aimco,” which sold it to POAH in 2011, recalls William Eager, POAH’s vice president for the Chicago area. “It was well occupied and in pretty good shape, but it was ­outdated.”

The Decision: The first order of business at Renaissance? Replace the window air-conditioning units with central air-conditioning. “We always want to set up properties for the next 20 to 30 years, because we buy things intending to keep them,” Eager says. Installing central AC promised to not only improve energy efficiency and comfort at ­Renaissance, but also raise the overall value of the 117-unit property for future investors. POAH also installed new kitchens, bathrooms, flooring, and roofing, along with other updates at the brick walk-up property. “We’re not doing super–high-end stuff,” Eager says. “We just want to look like nice, safe, decent housing.” Like market-rate owners do, POAH renovated Renaissance while it was occupied, using two vacant apartments as “hotel units” to house residents while their units were under ­renovation.

The Result: One year and $4.5 million later, the tax-credit property is nearly fully occupied, by a mix of residents who meet the minimum and maximum area median income ­requirements.

The Situation: When Bell Partners bought Ansley at Park Central in 2011, the 490-unit property wasn’t hurting for amenities, thanks to its two resort-style swimming pools, media room, and fitness center. But it wasn’t living up to its financial or operational potential. “At acquisition, the property’s rents were well below market, and there were opportunities to capture other income, such as trash and fees,” says Emily Moore-Pleasant, an asset manager at Bell. “The property was tired and had a tremendous amount of deferred capital [improvements], delinquency [problems], and issues with the tenant profile, and dying or nonexistent landscaping,” says Moore-Pleasant, who also remembers garbage-strewn breezeways and pet-waste issues. “It was generally in need of a lot of love.”

The Decision: Bell wanted its new acquisition, which it named Bell Park Central, to capture upscale renters looking for a different floor plan (the property has garden, townhouse, and mid-rise apartment units) and convenient access to jobs in nearby Medical City, ­Uptown, or Dallas’ central business district. So it invested $3 million in common-area and in-unit upgrades, gutting the clubhouses and transforming them into a 24-hour fitness center, resident lounges, and leasing/management offices. Bell added an outdoor kitchen and fire pit. The company also addressed the pet problems at the property by adding a pet park and renovating a laundry room into a dog wash after installing washers and dryers in the apartment units.

The Result: Monthly rents have climbed by $62 per unit at Bell Park Central, which is solidly within Bell’s ­expectations for post-rehab rent growth for such an acquisition.