Full renovations no longer have the advantage!
In the ever evolving rental market, we are seeing significant changes in how operators do business.
From 2018 through 2022, a majority of multifamily operators were doing full turns on units to achieve maximum rents. Most operators were doing the following to achieve the greatest return on their investment:
- New kitchen cabinets
- Hard surface countertops
- New flooring
- New appliances
- Full bathroom remodels
Additionally, owners were completing exterior improvements including new windows, new roofs, new siding, updated landscaping and more.
Starting at the beginning of 2023, this practice began to change as the cost to complete a full renovation more than doubled since 2018, in many cases due to the price of product, labor and permits. The pool of investors we consulted, stated that what was a $12,000 renovation in 2018 is now a $25,000+ renovation 5 years later.
In addition to skyrocketing renovation costs, the rental rate owners could secure after full renovations has begun to plateau, and in many cases, decline. Vacancy rates have increased due to additional units being built over the past 18 months, and rental rates hit their peak in September of 2022.
Because of these factors, we have seen a lot of our owners forced to give rent concessions such as free rent for a few months, lower security deposits, or lower rental rates.
One of our clients who owns a 40+ unit apartment building on the lower South Hill, was achieving 1bedroom/1bathroom rents in the ballpark of $1,375/month in 2022, after consistently doing full unit renovations.
When renewals came due in 2023, their vacancy rate skyrocketed from 1 vacancy to 9 vacancies. There were far too many units being built in the region to compete. This client eventually dropped rates down to $1,075 just to fill out the units.
Since that time, our owner has slowly been able to raise rents to get closer to $1,300/month. The main change allowing for this escalation to be possible, is that this owner is no longer investing $25,000 per month in full renovations. Instead of fully renovating every unit from top to bottom, they are now only updating elements as needed.
For owners looking to add value to their projects, we recommend investing in some light renovations and doing a thorough clean-up of their properties, instead of doing full renovations.
- A few simple elements that can be addressed are:
- New paint
- New light fixtures
- New cabinet hardware
- New blinds
- New bathroom mirrors
- Refinish wood floors
- Deep cleaning
- Clean up landscaping
In today’s market, these simple fixes can help you achieve a better return on your investment. To learn more or discuss further, reach out to SVN Cornerstone’s Multifamily Team for more information.
SVN Cornerstone Multifamily Team
Nate Gant is an Advisor with SVN Cornerstone. Nate has been an active member of the Eastern Washington real estate community since 2010. He has brokered more than $100 Million in real estate transactions, specializing in land development, REO and investment properties. To get in touch with Nate, email firstname.lastname@example.org or call 509.993.4440.
Jordan Lester is an Associate Advisor with SVN Cornerstone. Jordan served as a brokers assistant for 3 years with SVN Cornerstone before becoming a full time broker. Jordan specializes in the multifamily sector of commercial real estate. To get in touch with Jordan, email email@example.com or call 509.496.6922