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June 23, 2016
With the increasing cost of land and construction for new multifamily development, repositioning of older and outdated apartment buildings in desirable locations offers an opportunity for owners to capitalize on.
Given all the new construction of apartment buildings in the past few years, it may come as a surprise to many that the period of greatest apartment supply in greater Seattle was between 1986 and 1991, when approximately 80,000 new units were built. These properties are now 25 to 30 years old and are ripe for renovation rather than demolition.
Older communities tend to have desirable, larger unit floorplans and more open space than contemporary buildings. Although owners sometimes struggle to see the potential of an asset, with a creative vision, buildings can be transformed to quickly generate substantial increases in market rent, net operating income and appraised value. Often the return on investment is two to three times the money invested.
There is also an environmentally conscious aspect of renovating rather than building ground up that is appealing to renters in today’s ecological marketplace. While downtown residential towers must meet LEED status, invigorating older housing stock in our neighborhoods is sustainable repurposing.
The new approach
One of the obstacles for many owners in pursuing value-added development is the perceived need to either fully vacate a building or participate in a lengthy construction schedule dependent on unit-by-unit vacancy. We call this “renovating on turn” and both approaches can take over 24 months or longer. In the case of the latter scenario, construction costs will significantly increase since the work is intermittent and not streamlined.
For example, if you assume it takes six weeks on average to renovate and re-lease a vacant unit with an average rent of $1,000 a month and you’re spending $15,000 per unit on upgrades, you would realize $1,500 in vacancy loss and therefore a 10 percent increase in cost. Multiply that by 100 units and it’s a significant loss. “Renovating on turn” is the antiquated approach both laborious and expensive.
The new approach is tenant-occupied renovations. And these are not small projects. These are transformed communities in terms of interior decor, architecture, branding and improved amenity areas with the capacity to compete with new assets.
Tenant-occupied renovations are accomplished with a thoughtful repositioning campaign and a fully integrated and disciplined execution. When these spaces are improved to maximize their full potential, the large floorplans and more open space is an advantage that resonates with many renters.
Thrive has worked with clients to successfully reposition properties that at first glance appeared to be a rather mundane product in a submarket saturated with new apartment options. Our goal has been to transform these properties while fully occupied. It takes mastery of communication and integrated development services but current residents appreciate the upgrades and the owner is able to quickly meet underwriting objectives.
With increasing land and construction costs in the Pacific Northwest and a sincere focus on sustainability, there has never been a better time for renovations, in particular tenant-occupied renovations. It’s a successful option for owners to hold on to their long-term asset while capitalizing on today’s rental marketplace.
A local case study is Station Nine Apartments. Located in Lynnwood, the community is a 126-unit asset that was underperforming as a Class C property. Given the deferred maintenance and poor aesthetics of the property upon acquisition, the owner decided to pursue an extensive repositioning program with an investment of $30,000 per apartment.
Through value analysis investment underwriting and market positioning, Thrive engineered the exact set of upgrades to match the physical realities and nature of the target renter profile. While remaining fully occupied, the community was renovated in less than 12 months, resulting in market rent increases of 37 percent and an approximate increase in value (net of costs) of two times the capital invested.
The owner was also able to refinance the community 15 months after acquisition.
With upgraded interiors and repurposed common areas that offer the same type and quality of amenities found at newly built communities, Station Nine Apartments reflects all that a new building has to offer but with larger floorplans and more open space. Today, the transformed asset successfully competes with new construction.
As an integrated property management and development firm, we are all for new construction. Our region needs more housing supply and some older property configurations are not feasible for renovation. The tower growth in downtown and mid-rise development in urban centers is a sensible, sustainable model for a growing city.
But as our city becomes denser, we simply believe that a mix between repurposed vintage buildings and new construction provides a greater value for all. It allows local families or smaller LLCs to hold long-term assets, retains architectural diversity in our neighborhoods and provides physical “space” in our urban landscape.
While new construction will always establish the upper range of market rates, invigorating older housing stock will make an asset much more competitive with a wider range of renters. In looking to the future, this is the new entrepreneurialism of real estate.
Rose O’Dell is a principal and executive vice president at Thrive Communities Management.