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Keep Your Options Open During Renovations

making renovation plans

By Les Shaver

In a slow rent environment, apartment operators need to focus on where they can get the most bang for the buck in renovations.

While some brokers may be marketing 2- and 3-year-old apartment communities as potential “value-add” deals, most apartment companies want to see a few more years pass before they invest in a renovation.

“The sweet spot [for renovation] at Camden is a 10- or 15-year-old property at the end of its generation life cycle,” Travis Oden, Vice President of Asset Management at Camden, said at NAA’s Maximize Conference, Sept. 23–24, in Atlanta.

“We’re trying to make a long-term investment,” Oden says. “We want to do the right scope and do it one time. If we do it right and do it intentionally, we’re set up for the next 10 years of ownership.”

But what’s the right scope? It varies by company and depends on a number of factors, including the economy, the local market and the competition.

Return expectations and hold time also matter. Peggy Panzer, Vice President of Business Development at Laramar Group, says a 20 percent ROI is the sweet spot for her firm’s renovations but that operators need to know what they’re benchmarking that increase against.

“Some folks calculate the rent lift based on the market rate for the unrenovated floorplan while others calculate it based on the rent paid by the last resident,” Panzer says. “If you’re looking for 20 percent, consider which basis you’re using and why.”

Sometimes, apartment operators don’t have to do a lot to move the needle and get the highest return.

“Less is more,” says Greg Slang, Vice President of Asset Management at Kettler. “Sometimes, you can find the highest ROI keeping the scope to a minimum.”

Cristina Istrate, Senior Analyst, Asset Management, at FCP, says it’s important for operators to keep their options open in other ways, too.

“Having the option to add or remove certain features [such as a pet nook] on demand is important to us,” Istrate says.

Bridge Property Management builds in options by doing various renovation packages. “It can get confusing, but it doesn’t seem to be a point of contention for prospects,” says Tim Reardon, COO at Bridge.

Ivy Christman, COO at Quest Management Group, says she’ll provide a “look book” with two or three renovation options for clients and investors. Their input and market conditions play a huge role in determining the type of renovation Quest does.

“If the market is really soft, you may do minimal upgrades and get no [rent] bumps at all,” Christman says.

Ryan Kirby, a Vice President at Village Green, says apartment operators shouldn’t go into a renovation with “both feet” in an unproven market until they test it. He recommends that operators do their home[work?] upfront and be prepared to adjust on the fly. “You need to try a couple of different types of packages before you go all in,” Kirby says.

Kirby says one option might be a premium package that includes new cabinets, quartz countertops, stainless appliances, hardwood flooring, new lighting and paint. A second package might include a scaled-down version that includes cabinet door refacing, granite countertops, stainless appliances, wood vinyl flooring, new lighting and paint. “You should be prepared and have different renovation packages scoped out in case you need to pivot because the desired package isn’t absorbing,” Kirby says.

And if something doesn’t work, operators must be willing to change direction. “You need to be nimble,” Christman says.