Analysis of investments in capital expenditures are front and center in the February study, "Improving America's Housing 2015: Emerging Trends in the Remodeling Market," by Harvard University's Joint Center for Housing Studies.

In the wake of the housing market crash, soaring demand for rental units has fueled a strong recovery in spending on the rental stock. The study estimates that improvement expenditures in this market amounted to about $31 billion as of 2013, or $54 billion if maintenance and repairs are included.

This translates into average annual spending of about $770 on capital improvements per rental unit, and about $560 in maintenance and repairs. According to the NAA's Annual Survey of Operating Income and Expenses, per-unit capital spending on professionally managed garden-style properties with 50 or more apartments is even higher at $900.

The NAA survey also indicates that capital investment in these rental properties increased in 2013 in nearly all regions of the country. Similar to homeowner improvement spending, average annual rental expenditures in the Northeast and Pacific regions climbed sharply during the housing boom and then fell sharply during the bust, and are now well below the pre-recession peaks.

In contrast, spending on rental properties in the interior regions has already surpassed previous highs. The only region where rental spending appears to have leveled off is the Southeast, where homeowner spending has also struggled to revive.

Among professionally managed communities, top markets for rental improvement spending include San Francisco, Los Angeles, Washington, D.C., Minneapolis and Denver, where annual expenditures averaged $1,200 or more per unit during 2012-13.

Compared with the previous two-year period, rental spending rose rapidly in several metros, including certain distressed markets (such as Detroit and Phoenix), as well as areas where rents were already high or rising (San Francisco, Dallas, Denver, Austin, Texas and Washington, D.C.).

Metros with the lowest expenditures on apartment communities include St. Louis, San Antonio, Sacramento and Las Vegas, averaging less than $700 per unit. In most of these areas, both rents and operating incomes were lower than average, leaving few resources available for reinvestment. In some cases, the rental stock is newer and thus in less need of repair. In other cases, the markets were hit especially hard by the Great Recession. The average apartment turnover rate in these metros is also higher, perhaps indicating greater difficulty maintaining profitability in these markets.

Rental Property Outlook

On the rental property side, remodeling expenditures are expected to remain strong, although growth could moderate in a handful of metro areas if new construction results in excess supply. Overall, though, this market is likely to grow as rental demand and rents continue to rise, especially in the Northeast and West. At the same time, affordability 

concerns in several major markets are likely to shift demand toward middle-market rentals. These properties may in turn see stronger investment relative to the higher-end, professionally managed stock.

Single-family rentals are also a potential growth market for remodelers. From 2006 to 2013, approximately 3.6 million single-family homes were added on net to the pool of units either rented or for rent. The American Community Survey indicates that metros where at least 100,000 single-family homes were converted to rentals include Phoenix, Los Angeles and Atlanta.

Given the larger average size of single-family homes, as well as the higher turnover rates and maintenance needs of rentals, property owners will have to make significant investments to repair and update this stock.

Transitioning From Homeownership

Since the housing downturn, the share of U.S. households that rent rather than own their homes has increased. Indeed, the national rentership rate for households under age 35 stood at 64 percent in 2014, its highest level in three decades. For many of these younger households, the decision to rent reflects lifestyle preferences for more urban locations, housing affordability issues given their generally lower incomes and higher debt and greater awareness of the financial risks involved in homeownership.

While rental demand has thus increased, investment in the rental stock has not kept pace. Production was so depressed during the housing downturn that the median age of the rental stock rose to 41 years in 2013, up from 35 years in 2005. However, capital investment in the aging rental stock is finally on the rebound. NAA reports that per-unit spending on professionally managed rental properties with 50 or more units jumped by more than 40 percent between 2010 and 2013; however, some of this increase may have been compensating for a decline in maintenance and repair spending, thus offsetting some of the overall growth in spending. On net, then, the recent growth in total spending on this portion of the rental stock was less than 20 percent.

But even this lower figure may overstate the level of rental housing investment because the estimates cover only a small portion of the stock. In particular, single-family homes make up approximately one-third of the rental inventory, and multifamily communities with two to four units account for another 17 percent.

And while single-family and small multifamily rentals are more spacious on average than units in larger multifamily properties, their rents per square foot tend to be somewhat lower and thus provide less gross revenue for capital expenditures. 

The owners of these types of properties are also likely to be individuals or couples with limited holdings and little experience managing rental portfolios.

Moreover, the number of single-family rentals has increased significantly in recent years as a result of the housing market crash. According to Joint Center estimates, 3.6 million single-family homes were added on net to the rental stock from 2006 to 2013, largely as a result of the foreclosure crisis. These homes were typically under-maintained not only during the lengthy foreclosure process, but also beginning when their owners realized that they were in financial trouble. When some of these distressed properties are eventually converted back to homeownership, another round of improvement spending is likely to ensue.

Spending on rental improvements and maintenance is lower on average than on owner-occupied homes. The Joint Center estimates that per-unit improvement and maintenance spending on multifamily rental units averages $1,300 annually. By comparison, outlays average $2,200 for owner-occupied multifamily units (condos and co-ops), and almost $3,300 for owner-occupied single-family homes.

The composition of improvement spending also differs in the rental and owner markets. Almost 60 percent of multifamily rental expenditures are for replacement projects, but fewer than 50 percent of homeowner expenditures fall into this category. 

Within replacements, exterior projects account for 27 percent of multifamily rental capital expenditures, systems replacements and upgrades for 20 percent, and flooring, carpeting and other interior replacements for 12 percent-all above the shares of spending for comparable projects in owner-occupied homes.

In contrast, kitchen and bath projects make up a mere 10 percent of capital improvements to the multifamily rental stock, while projects such as pools, playgrounds, clubhouses/common areas, laundry rooms, parking and garages and landscaping account for the remaining 31 percent. 

For information about the study, contact Elizabeth A. La Jeunesse, Research Assistant, Joint Center for Housing Studies, Harvard University at 617-495-9296.