Value-Add Work Begins to Ramp Up
Originally published by: Multifamily Executive — October 6, 2011
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Last year, David Nischwitz, senior vice president and director of property redevelopment for Memphis-based REIT MAA was the only person on the redevelopment panel at the Multifamily Executive Conference that was really bullish on redevelopment. A year later Nischwitz, said the company planned to redevelop another 3000 units. But this time, he wasn't alone. The other panelists on "Made Over: Understanding the Value Add Marketplace" at the 2011 Multifamily Executive Conference also see the pace of redevelopment increasing in 2012.
Jason Hanna, vice president of operations with the Irvine, Calif.-based The Bascom Group said his firm planned 40 repositionings totaling about $131 million in 2012, while Steve Boyack, senior vice president with Denver-based The Laramar Group, said his firm plans about $100 million in renovations in 16 properties. Yes, it looks like apartment upgrades are returning. "The market wants a nicer unit," Nischwitz said.
But there are specific touches the market is seeking as well. In his $4,500 to $5,000 per unit rehasb, Nischwitz focuses on plumbing, lighting, and door hardware, countertops, appliances, and floors. "If the flooring is in bad shape, everything looks worse," he says.
Hanna said Bascom relies on upgrades like two-tone paint, brushed nickel hardware, and a vinyl flooring. He says clubhouses and pools provide the highest net operating income (NOI) for upgrades
But some rehabs are bigger. In one San Antonio property, Bascom did a full exterior repaint and clubhouse upgrade with a cabana and ambient lighting. Hanna says, on average, the company gets a 12 percent to 15 percent rent increase on these improvements.
At Laramar, Boyack said Laramar will spend around $7,000 to $7,500 per unit for an upgrade, and he likes a 20 percent yield but has seen that move down to the 15 percent range. "To get a 12 percent return, we'd have to think hard (about a project),” he said.
Mike Rovner, president of Simi Valley, Calif.-based Mike Rovner Construction, says retrofits that provide a structural upgrade to meet seismic standards are necessary in California. He says he's also getting properties that have water issues that must be addressed with improvements in decks, balconies, windows, and grading. But outside of that, many upgrades depend on the client's appetite. "Each client has a different strategy," Rovner says. "Most owners would prefer to upgrade the kitchens and baths on a regular basis."
Often, Rovner says new construction drives an apartment renovation. For instance, he's seen new properties open with a dog park. Soon his clients want them on their neighboring existing properties as well. "I can't count how many doggie parks I put in over the last three or four years," he said.
Nischwitz says old amenities like tennis courts can provide opportunity. MAA has started making one half of the old tennis court a dog park and putting a fire pit, barbecue, and seating on the other side. "We’re taking things that people don't use anymore and trying to create multi-use amenities," he says.
Laramar also focuses on enhancing existing amendments. It may put an outdoor theater near the pool, which has seating, for movie nights. "We do anything we can to create gathering spaces in the community," Boyack says.
Despite the optimism in the apartment rehab world, Nischwitz reminds owners that they still need to what they’re getting into. "You have to know your market and what your diminishing return is," he says.
But the consensus was the markets seem to be back for rehab. And as properties from special servicers hit the market, that volume could increase. "We do management for special servicers," Boyack said. "There will be more product released on the marketplace. I think that will create a unique opportunity for value-add."