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Is a Cease Fire Coming in the Amenities Wars?

 Amenities Wars

One executive thinks the industry is ready to start scaling back amenities.

Katie Bloom, Managing Director, Goldman Sachs, doesn’t pull punches when it comes to amenities.

While developers and renovators around the country have spent a lot of resources trying to build bigger, better and more spectacular amenities throughout this cycle, Bloom thinks a return to the basics in the cards.

“My guess is that people start to go in another direction on amenities,” she says. “I think we’ve gone a little bit overboard.”

If these were amenities were being used, that would be one thing. But Bloom is skeptical about the absorption of some of her company’s offerings. “It is amazing how few people use fitness centers,” she says. “I think it’s about 15 percent.”

But Bloom’s opinion was not unanimous on her panel at NMHC’s Apartment Strategies Conference in San Diego. Executives from other companies, specifically those that specialize in value add, said they still see rent premiums for amenities.

Amenities do not have to be the traditional gym or business center. Technology can improve resident satisfaction without requiring square footage in a building. “We are trying to use technology to improve the resident experience,” says Leonard Wood Jr., Senior Managing Director, TCR.

Cliff Nash, Senior Managing Director of Finance for Greystar said the company is working on app-based concierge services similar to products like Site Plan. Other companies are also intrigued by this technology. “If there is maintenance needed a resident can schedule the repair through the Site Plan app,” said Leonard Wood Jr at TCR.

Cost Rise

If there is ultimately a movement away from certain physical amenities, cost will certainly be a driver. “It’s very expensive,” Bloom says.

If an apartment investor is buying a community with designs on upgrading the amenities, there are several factors conspiring against amenity escalation in the value-add space. First is simply the cost of buying apartment communities.

While Robert Hart, President and Chief Executive Officer, TruAmerica Multifamily says his company is looking for the 15 percent to 20 percent in the rent rolls that is not being realized, others are having trouble finding deals.

“We’ve seen a contraction in returns on value-add properties and a scarcity of value-add opportunities—the potential for 15- to 20-percent returns on renovation capital is a lot less obvious than it used to be,” says Helen Garrahy, Senior Vice President, Heitman.

Part of the problem when looking for deals is the amount of capital chasing apartments in the market.

“Everyone has a bunch of money,” Bloom says. “It will continue to be competitive. The bid-ask spread is growing. There is more money than there is deals.”

Whether it is new development or renovation, construction costs are also making it hard to underwrite deals. “Our biggest risk is 2019 is cost construction overruns,” Wood says.

Cortland found a way to control construction costs by importing materials from China. However, looming tariffs could make that a trickier proposition.

“Tariffs have not yet increased the costs,” says Steven DeFrancis, Chief Executive Officer, Cortland.

While cost increases could be coming, manufacturers are taking action. “There is a movement of good manufacturers out of China,” DeFrancis says. “Manufacturers are looking to set up in other parts of Asia.”

Ultimately, Hart is concerned that tariffs will have some negative effects. “They will make it harder to modernize apartments,” he says.