Benchmarking Amenities to Determine Their True Value and Price
Apartment residents today are quick to say what amenities they most prefer. While surveys offer great insight, the ultimate way a renter communicates interest with certain features is by signing a lease. An amenity rich unit that sits vacant on the market too long is an indicator that the price may be too high.
A unit’s amenity value and how to price it is often debated in multifamily board rooms. Generally, amenities are just shy of 6 percent in total rent revenue, says RealPage, Inc., head of data science Rich Hughes.
Depending on the market, a community feature can bring $15-$80 in additional rent per month, according to a National Apartment Association study released earlier this year. A cluster of unit amenities like new granite countertops, hardwood floors and balconies typically generate about $50 per month.
By benchmarking units and their specific features within a property and comparing transaction data, multifamily operators can begin to understand amenity values and pricing, Hughes says. RealPage’s revenue management software, YieldStar, can perform an amenity analysis that considers how well a unit leases at an established price by comparing the amenity type and days on the market to a unit that doesn’t have the same feature.
Comparing units with amenities to those without offers clear picture of value
The information is particularly helpful when developing new properties or rehabilitating others in what has become an intense amenity-driven market.
“This is about looking at what makes individual units unique or preferable and more desirable as a home, and we’re making sure we’re pricing those right, putting the right things in,” Hughes said. “It’s something, because it’s not as volatile as other pricing components that often gets overlooked.”
Traditionally, properties have made the mistake of assessing an amenity’s potential market value based on investment cost and ideal payoff time, he said. In reality, the price lift could be too high causing potential renters to look elsewhere or choose to rent a less expensive apartment that doesn’t have the amenity. Consequently, the apartment with the amenity could sit vacant for several weeks, earning no return at all.
By comparing market movement of apartments with certain amenities to those within the community that don’t have them offers a clearer picture of the true value.
“People think they’re making their money back, the trouble is no one is paying that rent,” Hughes said. “That’s why people are really considering amenities very well at the moment. You can charge whatever you want, but people won’t pay too much.”
For example, an apartment featuring a pool view priced at $50 more a month than units overlooking a greenbelt only generated four leases at an average of 66 days on the market, based on RealPage transaction data. Units without the pool view rented at a pace of five times more on an average of 24 days on the market. The data suggests that the price of units with the pool view was too high and should be decreased.
The opposite is true for 19 first-floor units priced at a $35 premium that leased on average in 27 days compared to similar second-story units that took an average of 46 days to fill.
Benchmarking within a property is most effective
The analysis is most effective by comparing units within the same property, not within a specific market. Renter amenity preferences vary from market to market and so does the quality and availability of certain amenities. While two competing properties may offer balconies, it’s unlikely that they are exactly the same size and style, making comparison complicated.
Hughes says that if all the amenities are priced right, the days on the market should not be too different between other amenity groupings.
“That’s to say because the value is the same, nothing should sit much longer on the market than anything else,” he said. “Nothing should be flying off the shelves if everything is the same value. If an amenity is underpriced, it will move quickly. If it’s overpriced, it will languish.”
Hughes said it’s important to look at the correlation between amenities, which often occur in groups and are sometimes difficult to segregate, when determining a value. A grouping of “high ceilings” and “fireplace” within a unit may make it difficult to determine which amenity is driving rent and desirability.
“There’s a perception of amenities being unrelated,” he said. “Amenities are not like that, they tend to be packaged in groups. So you have to apply data science techniques when you analyze them.”
Making better operational investment decisions
RealPage Vice President Thomas Mattera says the data ultimately helps multifamily operators determine what amenities get the biggest bang for the buck and help fill apartments, whether for renovations or new developments.
“It’s how you optimize your amenities,” he said. “If you’re building or developing, you want to know what the best amenity is in the neighborhood. This translate to lease-ups. It’s touching the life cycle for operator and owner, making for better operational investment decisions.”