When Is It Time to Renovate?
There is no hard and fast rule about when to renovate a multifamily asset. However, the objective is to complete the renovation before a property begins to have negative reviews on social media and to lose residents to its competitors. Awareness of what competitors are implementing will also help guide the timing of renovation.
A visually tired asset is challenged to keep pace with market rents. Waiting too long to renovate can draw a manager into a vicious cycle. A property that has begun to show signs of wear will most likely begin to show a decline in income because residents will move to newer, trendier properties. As income goes down management tends to pull back on spending. But delaying a much-needed refresh ultimately costs more. The longer the property is in decline, the greater the risk of losing residents and missing out on rent increases. And the longer it is in decline, the more money it will cost to bring it up to speed.
Proper timing for budgeting, planning, and executing a renovation is critical to getting ahead of the tired‑building syndrome. To stay current with lifestyle and design trends, most multi-family properties are looking at a 7- to 8-year cycle for the public spaces. This will naturally vary depending on location and competition. In most cases, at least a cosmetic renovation is required on this schedule. Due to the cost of unit renovation, it is unusual for a property to upgrade before 10 to 15 years. It is, of course, wise to budget with a healthy capex well ahead of the need for renovation.
What Level of Repositioning Is Right for A Property?
Repositioning is a broad term. It could encompass a minor upgrade all the way to a complete gut of units and public spaces. Or perhaps even a new structure. The level of the renovation selected by management will be budget-driven, optimized by return on investment. Age of the building, the amount of wear-and-tear, and market trends are important factors to consider. Prioritizing the upgrades becomes an important piece of the planning to adhere to budgets. For more on the budgeting process, see our article in the next issue of this report.
The “lipstick and rouge” approach: If a property is 3 to 7 years old (or was upgraded 3 to 7 years prior) and is showing wear or beginning to look dated, a minor upgrade may be all that is needed. This approach may involve some new furnishings, art, and accessories and perhaps some new finishes. The idea is to spend just enough to provide a lift without “breaking the bank”. Allow 4 to 6 months for this type of renovation.
A mid-level upgrade: A mid-level upgrade takes the “lipstick and rouge” approach a step further and could involve the full replacement of FF&E. This level of renovation would not normally involve moving walls. A mid-level renovation can do much to improve a property and will help to keep it viable for several years. Allow 6 to 9 months for this type of renovation.
A full renovation:
If a property has held up well, the time to consider a full renovation of the common areas, amenities, and corridors is likely at the 10-year mark. This is generally the point in a renovation cycle where design, lifestyle, and operation trends have shifted noticeably. Waiting too long to begin the process will negatively affect the competitive advantage in the marketplace. All too frequently, old buildings (built in the 1960’s to 1990’s) have had the common areas and amenities renovated for some time. To keep rents on track, stay competitive in the market, and maintain a happy resident base, a more extensive renovation is recommended for these properties. In a full renovation, expect to have more construction – including building new walls, reshaping spaces, or changing the room usage. This level of renovation will increase the planning time, overall investment, and resident disruption. The new design will likely require MEP changes. Allow 9 to 18 months on average for this type of renovation.
Factors To Consider In Determining The Level Of Renovation Needed
- The program – how do the spaces need to function to meet the current resident expectations and management needs?
- What is the existing condition of the building – a little out of date or very tired?
- How old is the building, and when was it last repositioned?
- Is the building energy efficient? Do the mechanical and lighting systems require replacement or retrofit?
- How does the property compare with the current competition, and what new construction is in the pipeline?
- What are the residents and prospects saying on social media?
- What does management expect to achieve by renovating? For instance, is the building to be repositioned from a C to a B, a B to an A, or is the goal to make the property the best B in its submarket?
- Will the renovation involve only finishes and furniture, or will spaces be re-arranged?
- What is the expected completion date?
- Is there a fixed budget that cannot be exceeded?
By keeping these considerations in mind, management can keep the property in the best shape to compete in the marketplace.