Multi-Housing News - February 2009 - (Page 14)

property management Renovating in a Recession By Keat Foong, Executive Editor Prospects will be less willing to pay for certain improvements, so developers need to modify their approaches R Renovation strategies need to be readjusted in a recessionary environment. Apartment owners may not get a return on their rehab investment as market rents can stagnate or decline down the road. And prospects who are out of work, earning less, or insecure about their jobs may not want to pay for the improvements. Further, financing is difficult to obtain, especially during the current credit crisis. In such an environment, many apartment owners have simply stopped renovating properties. “Overall, until the credit situation, as well as the economy, improves, we will see very few properties renovated,” predicts Rob Rosania, CEO of Stellar Management, which owns and manages 20,767 units in major cities including New York Chicago, San Francisco and Miami. Another apartment investor, Sterling American Properties Inc., has suspended renovations in some markets at this time, “because prospects are not paying for certain upgrades,” says Tom Dolan, senior vice president in charge of multifamily asset management. Sterling American Properties has invested in more than 25,000 units throughout the country. However, rent increases are still possible in many markets, such as in the West and Northeast. And provided apartment owners have the financial wherewithal or can obtain financing, they can still embark on property capital improvements, whether of existing properties or recently acquired ones. “In other markets, we are upgrading because we are in for the long haul,” says Dolan. Being selective One of the most important steps to take is to make sure that the renovations will lead to a tangible return on investment. “It is critical that any upgrades that we make continue to provide a ‘spread’ in rents between un-renovated and renovated that justifies making this investment,” emphasizes Dave Woodward, CEO of The Laramar Group. “It is critical that these renovations pay for themselves in the form of higher rents.” The Laramar Group owns, acquires and manages apartments throughout the nation and has built up a $1 billion portfolio. For the company, every component of unit upgrades in a value-add project is analyzed to determine if it will justify an increase in rents, says Woodward. And the renovations have to be selective. In some cases, The Laramar Group has found that residents are no longer willing to pay higher rents for new kitchens and baths, but they may prefer in-unit washers and dryers. Hence, it may be more cost-effective to install washers and dryers rather than renovate the kitchens. In terms of return on investments, The Laramar Group underwrites renovations to produce annual returns of at least 20 percent (a five-year payback) on incremental dollars invested. Along the same line, Sterling American Properties, which acquires “solidB” apartment properties, would generally enter into major renovations only if the renovations would yield a higher income. It requires double-digit returns north of 12 percent, says Dolan. “We will not enter into [the renovation] if the returns are single-digit,” he says. Rosania, of Stellar Management, points out that apartment owners need to ensure every dollar spent ren- Stellar Management’s extensive renovation of the 1,119-unit Enclave Silver Spring, Silver Spring, Md., included a new entertainment center. 14 February 2009 | Multi-Housing News | Official Publication of Multi-Housing World

Table of Contents for the Digital Edition of Multi-Housing News - February 2009

Multi-Housing News - February 2009
Contents
From the Editor
Executive Insight
Perspective
NMHC Washington Outlook
Market Forecast: Gulf Coast
Renovating in a Recession: New Rules
Development & Design: Make Way for Modular
Products: Security
Finance: Structured Financing
Directory: Multi-Housing Finance Providers
Technology: Utility Management

Multi-Housing News - February 2009