In the previous issue, we discussed how to know when your multifamily property should be renovated and what level of renovation was appropriate. Once you have determined this, you will need to set a budget.
How much should you budget for your renovation?
Too often the renovation budget is set by an underfunded escrow account or is a result of mere guesswork. If the budget is set prior to a comprehensive understanding of the building’s existing conditions, the amount of space to be renovated, and the marketing challenges, the number will be inaccurate. Either method can set the owner up for disappointment.
Determining a budget is a task that should take place long before the renovation is to begin. The budget for repositioning a property is frequently determined in the year preceding the expected renovation. Depending on the level of the renovation planned, the budget may need to be determined farther out and the dollars allocated across multiple years. Collaborative discussions to prioritize the work will provide the best possibility for accurately setting the budget and obtaining future ROI. To assess the market, understand the conditions of the building, and develop a budget that is based upon real conditions, consider a team approach from the beginning. Involving your design professional, management/marketing consultant, building engineer and asset manager before the budget is set will help to alleviate unrealistic expectations.
Depending on many factors that cannot be controlled for your plans, construction pricing can vary from year to year. Even with the best planning, actual bids may come in higher than anticipated. It is best to have a phasing and VE plan in place in the event that this occurs.
Phasing of the construction can be a great way to manage a budget that needs to be spread over a few years. However, it is important to consider that there usually is a premium cost to phasing which will need to be considered in the budget.
Many owners frown at earmarking funding for renovation projects. They require management to meet the funding requirements from operational cash flow. This can be problematic for a variety of reasons. The cash flow requirements for renovation projects are frequently substantial, and the funds are, in most instances, required at the early stages. Professional and permitting fees, deposits, and advances need to be paid out before materials are procured and the contractor begins work. Additionally, during the renovation process, the property will not show at its best. This creates a tough selling situation for the marketing staff, which could mean a decline in revenue during construction. This will further limit the operational cash flow available for the renovation. To successfully meet your budgetary needs, you should consider setting aside funding specifically for the renovation. A well-thought-out budget that includes a construction timeline will help to manage funding and decrease strain on operational cash flow.
A cosmetic renovation may be considered an expense as it will serve to refresh and to maintain the look of the building for a period of time. A more comprehensive renovation will actually increase the life of the asset, so it would generally be considered a capital expenditure.
Keeping in mind that the core purpose of renovation is to improve revenue streams, it is important to consider that this will happen effectively only when the life of an asset is increased.
Owners and stakeholders will demand bang for their buck. Any renovation project is going to be tough to sell if there is uncertainty related to the return for the investment. Consequently, part of planning a renovation includes doing the math to obtain the estimated ROI.
So many variables impact rents – such as the age of the building, its location, the surrounding competition, and the tenant profile – that ROI will vary widely from market to market and from property to property within the same market. As a result, nationwide data is difficult to come by for multifamily housing renovations. However, skilled property owners say it’s reasonable to expect a 10 to 30% ROI on their renovation projects, with wood floors, kitchen upgrades, and improved interior lighting as some of the top ROI generators. For purely cosmetic renovations, a 25 to 30% return should be the target. It is important to analyze typical ROIs in your market before setting a budget and determining what upgrades to include in your renovation. The life span of your renovation will also have an impact on your ROI, so be sure to include this in your calculations.
By addressing these considerations, you can have a successful renovation that will increase the life and profitability of your property.
 Jason Van Steenwyk, Rental Property Renovations that Pay Off, (Sep. 2, 2015), http://www.allpropertymanagement.com/blog/2015/09/02/rental-property-renovations-and-improvements-that-pay-off/.
 John Caulfield, Rehab ROI: Which Upgrades Cause the Biggest Rent Bumps?, (May 28, 2014), Multifamily Executive, http://www.multifamilyexecutive.com/design-development/renovations/rehab-roi-which-upgrades-cause-the-biggest-rent-bumps_o.
 Harrison Willis, Repositioning a Multifamily Asset, (2016), Cornell Real Estate Review, 14(1), 62-69, http://scholarship.sha.cornell.edu/crer/vol14/iss1/12.
 Donald M. Davidoff, Rehab ROI: Do the Math, (Oct. 28, 2014), Multifamily Executive, http://www.multifamilyexecutive.com/business-finance/commentary/rehab-roi-do-the-math_o.
Check out the full renovation of Park Bethesda here: http://www.hartmandesigngroup.com/renovations/Residences-at-Capital-Crescent-Trail/
Written by Phyllis Hartman, ASID, LEED AP
POSTED ON MAY 6, 2017
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, 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 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
By keeping these considerations in mind, management can keep the property in the best shape to compete in the marketplace.
Check out the full renovation of Park Bethesda here: http://www.hartmandesigngroup.com/renovations/Residences-at-Capital-Crescent-Trail/
POSTED ON MARCH 8, 2017
Lighting is one of the most important elements to consider when designing any space, and this important tool is continually evolving. Meeting the requirements of state, county and national regulations as well as the electrical engineer’s energy model necessitates evaluation of our client’s needs on a grand scale. This evaluation must balance many factors including budget, aesthetics and energy efficiency.
Though the first cost is still considerably more than conventional fluorescent and incandescent luminaries, LED lighting is the way to achieve both the low wattage requirements and the appealing effect. With this in mind, a realistic approach to the lighting budget is important. Considering that the savings over time will well out weigh the initial cost, LED lighting is an investment that pays off.
Not only will the cost of electricity be substantially lower, the greatly reduced labor (to re-lamp) and bulb replacement expense quickly help to recoup the initial cash outlay. Additionally, when renovating a building, consider the many retrofit LED lamps on the market. There could be no need to replace light fixtures and Pepco rebates may well be applicable. Whether using retrofit lamps for a renovation or new construction, choosing the right color temperature and rendition is critical to setting the mood and obtaining the desired ambiance. For calm, relaxing spaces, consider using soft, warm lights with orange and yellow hues (2700K or warmer). For a room that is intended to be livelier, like a fitness center, a slightly cooler temperature (3000 or 3100K) is ideal. Color rendition of 80 or higher is recommended for the best color interpretation.
To create the mood, many different types of lighting fixtures are required. Down lights provide general lighting and pooling of light on the floor, accent lighting is used for special features and art, while sconces and chandeliers are used for additional layering of light as well as decorative elements. The good news is that there are LED lamps for most fixture types today so you can easily achieve the look desired and contribute to the green initiative. If you’re working with an interior design firm, make sure everyone has a clear understanding of the mood you wish to create, the budget and required energy efficiency. Your interior designer will know the best way to utilize the natural light coming into the room, and how to properly support that light with general, task, accent, or a combination of all three types of lighting.
POSTED ON FEBRUARY 10, 2016
Timeless design can be functional and sensible. It is a style that suggests a quiet confidence. It’s not over the top, nor is it boring. Timeless design is perfectly scaled and proportioned. When using the elements of timeless design in creating a functional space you will see that the furniture will fit the room perfectly. It should belong to a room and be neither too large as to overpower, nor too small as to seem unimportant.
What defines Timeless Design? The irony is that it’s hard to quantify, but when you see it, you know it. It somehow stands out above that sea of mediocrity and looks, feels, or acts different. Timeless Design does not just happen. It cannot be rushed, nor is it hastily completed. It is borne of inspiration and preparation and executed with experience and skill. Timeless Design means that someone set out to create a space or product that remained relevant for the ages.
Timeless designs, much like classic design, steers away from overly decorated and overly busy patterns, shapes and spaces. It mimics the phrase “less is often more.” Be careful when incorporating a Color of the Year into your home. While fun and energizing, many of these colors will not stand the test of time. It may be best to incorporate this color with accent pieces and accessories.
Creating timeless design is relatively easy. Background colors should be neutral, and not busy. There should be an emphasis on clean lines and shapes. Furnishings should be timeless in design as well, drawing inspiration from antiques and items that continue to popular over the years. Hartman Design Group employs these timeless elements into their work, and nowhere is it more apparent than at Cathedral Commons in Washington, D.C. The HDG design team devised a sophisticated gray, blue and white palette accented by deep wood tones and natural stones to create a contemporary yet timeless, classic interior.
POSTED ON JANUARY 5, 2016
In our last post, Phyllis shared her insight on a commonly asked question about multi-family renovations: “How much will it cost?” Once the design team has a clear understanding of the project restrictions & goals, they can begin to move forward with planning. Here’s more insight from Phyllis on other commonly asked questions about multi-family renovations.
Due to social media, generational shifts, and market competition, we have found that design trends are rapidly accelerating. In the past, most owners would contemplate a repositioning when the property or previous renovation was 10 to 12 years old. Today’s resident and prospect shop the competition, are extremely informed, and expect the very best for their money. Those properties that are beginning to show wear and suffer from an amenity shortage will most likely see a resident exodus and may have to drop rent pricing to compete. Today’s modern resident wants lifestyle. As units get smaller, great amenities have become critical. They serve as an extension to the resident’s living space. Buildings that opened 5+ years ago are already behind in the trends. These buildings can be updated by transforming every available space to a resident amenity. Lobbies that were previously designed for visual impact can be turned into a socially active amenity by adding the right kind of furniture and creating intimate seating for groups and singles alike. Adding plug-and-play areas and communal tables will turn a dead lobby into a space with a great, active vibe. In today’s rental market, we recommend an evaluation of the common areas after 3 to 4 years. If the design has a timeless appeal, a simple refresh (ie: pillows, accessories, art) may be all that is required. At 6 years, it will most likely be time to deeply evaluate the market trends, the competition, resident expectations, and condition of the finishes.
March through October is the prime leasing season. To avoid disruption during this time, it is ideal to plan the construction start for the end of October and complete by March or April of the following year.
Whether simple or comprehensive, any kind of refresh or renovation takes time. Every client wants to spend their renovation dollars wisely, so it is important to allow time for the design team to program, design, vet, and budget the renovation. If permits are required, additional time should be allotted. Even a furniture refresh takes time to plan, and in today’s furniture world, it could take from 12 to 16 weeks to procure. For example, HDG designed a renovation at the first floor of Gables Dupont Circle Apartments in Washington, DC. Even though the space was a mere 1,500 square feet, the planning, vetting, budgeting, coordination, permit drawings and construction all took one full year.
POSTED ON JULY 20, 2015