Increasing multifamily renovation ROI in a time of COVID-19 Ira Singer May 26, 2020 Share on Facebook Share on Twitter Share on LinkedIn Share via email For multifamily investors, improving ROI from apartment properties is more urgent now than ever before. Value-add renovation projects can produce high ROI by allowing property owners to increase both rents and occupancy. Yet some owners are hesitant to move forward, due to financial concerns or concerns about the virus itself and bringing workers on site. There is good news: renovations that drive ROI may not require as much capital as you might expect, and on-site teams have found ways to work safely in the field. As a result, many multifamily building improvement projects are moving forward—just in a new way. There’s no reason to delay building improvements planned for this summer, but you will need to be mindful of how the job gets done. What’s different about the post-COVID-19 renovation process—and what’s not? Nearly the entire pre-construction process can take place over video conference calls while stakeholders are working remotely. This encompasses budget, constructability, time frame, design—including function and finish (product selection)—and contractor selection. In today’s world, you will likely do more video conferences and less site visits, but the work is essentially unchanged. During that planning process, you’ll need to consider the new environment on site. Making scheduling adjustments to accommodate social distancing is a big factor. To keep workers six feet apart, construction will need to happen in staggered shifts to keep the number of workers on a site low, which might extend the timeline longer than a regular renovation project might take or require additional shifts. Another key consideration is site sanitization. Special attention—and budget—should also be applied to heightened disinfecting and cleaning processes, masks and hand sanitizer for trade partners and proper signage with construction site guidelines (e.g., signs urging everyone on site to wash their hands, maintain six-foot distance, etc.). Value-add renovations for a spike in ROI With a recession looming, choosing building improvement projects carefully is more important than ever before. For multifamily owners and investors, it’s essential not to over-improve a building; updates that reflect the asset class of the property are most advisable and should be designed to drive occupancy and increase rents. For example, a workforce housing apartment community won’t need luxury bathroom finishes, but that doesn’t mean you shouldn’t renovate. Updates that bring bathrooms up to a modest standard in line with anticipated rents are increasingly a must to attract tenants. New countertops are still new, for example, even if they are not made from the most expensive materials. If you’re acquiring an existing building, the renovation should be planned in detail as part of the investment pro-forma. When negotiating the transaction, you can use the anticipated cost of the renovation to drive down the purchase price. Investment upfront can also allow you to save money on the ongoing operating budget. For example, installing low-maintenance or maintenance-free materials in common areas will allow you to reduce future operating costs such as janitorial fees and repair costs. Opportunities also abound in areas where maintenance or upgrades have been deferred or ignored. The property will become more attractive to potential tenants by performing standard maintenance at a higher standard than the previous owner. The five types of renovations to consider investing in for the highest possible ROI 1. Curb appeal The exterior of the building makes the first impression on renters—so you should consider: does the building entice renters or encourage them to move on to other options? Attractive signage is one underrated upgrade that can improve curb appeal, and well-designed siding can up the aesthetic while keeping the building easy to maintain. Maintenance-free vinyl shutters can also add textural elements and are a “one-and-done” type of investment. New siding is a more capital-intensive investment that certainly drives curb appeal; however, it should be carefully considered in terms of the ROI it will produce for the owner overall. 2. Security Ensure that the doors and windows in each unit lock effectively, as well as the front and back doors to the building. Install new doors or at least new locks for an efficient and maintenance-free fix to help tenants feel safe and secure. When searching for a new apartment, many potential residents will remove your building from their list if security isn’t a priority or properly in place. If security is currently substandard, this improvement can be a huge ROI booster, and a relatively capital-light upgrade. 3. Element-proof Protect your building against the elements with a high-quality roof and/or an effective gutter system. While a new roof will represent a significant capital spend, it will save plenty of money in repairs down the line by investing in it early in your ownership of the building. The new roof isn’t likely to impress renters right away, but it will save them—and property owners—headaches down the line, eliminating potential expensive repairs inside. 4. Unit layout While total square footage can be tight in older building apartments, sometimes a layout change can make the units feel significantly larger. Consider opening up or knocking out a wall to create an open concept in a smaller space, particularly if you can open up the kitchen. 5. Kitchen and bath finishes Many owners of workforce and affordable housing buildings make the mistake of over-improving kitchens and bathrooms. This asset class simply does not call for marble or granite finishes, when other, less expensive materials can still deliver a much-improved experience for renters. Newly updated yet less expensive countertops, cabinets, appliances and finishes can go a long way to attract new residents and raise the value of the building. Brushed nickel finishes instead of outdated brass is one easy, inexpensive and quick fix, and longer-term investments like newer appliances and durable flooring will impress renters while also reducing ongoing maintenance costs. Moving forward while acknowledging uncertainty Across all of these suggestions, don’t be tempted to make piecemeal upgrades. Many owners, in an effort to conserve immediate cash flow, improve buildings one unit or area at a time. As a result, they do not benefit from volume materials pricing or from a moment in time when the marketplace recognizes that an apartment community has become something different, better—and worthy of higher rents. While the cost may be higher to do it this way, an upfront capital spend will result in more impactful changes to tenant satisfaction and attraction—along with those lower maintenance costs that will start to pay off right away. Uncertainty surrounding the future of the economy and real estate investment markets will be with us for some time. While we manage our way through this time as an industry, it’s important to do what we can to improve ROI in existing properties. While the market may bring challenges, there are creative value-add solutions that can bring new opportunities for increased revenue and ROI. Ira Singer About the author Ira Singer is principal at Mosaic Construction. As a relationship builder with over 30 years of experience, Ira leads new business development, estimating, construction production, project management and the management of trade partner and vendor relationships for Mosaic Construction.