Using Business Intelligence, Benchmarking to Determine ROI on Renovations
A fact of multifamily is that apartments have to make ongoing investments to stay competitive in today’s market.
A renovation or value-add strategy can align an older property to better compete with a newer community down the street, even one in a higher class. Community-wide overhauls of flooring, cabinets and appliances refresh units to attract new residents and retain others. Typically, improvements result in higher revenue and increase the asset’s value.
But even the smallest upgrade comes at a high cost, and finding the balance between rent adjustments and a sound return on investment can be like walking a tightrope. A planned ROI may look good on paper but not always take into consideration key market dynamics. The true payoff may unknowingly take longer.
Real-time market data offers clearer insight on returns
Market data and benchmarking through business intelligence is changing the way multifamily looks at renovations and their return, say industry leaders. Arriving at a competitive rent for an upgraded unit that provides the right return has become more accurate through analytics, says RealPage Industry Principal Andrew Bowen,
“Up until this point, it has been your best guess,” he said. “A lot of time, it’s what you feel it’s worth to charge. But analytics are changing that.”
Real-time lease trade-out information and other critical market data obtained through business intelligence offers clearer insight into return on investment for renovations, Bowen said. The data is just one piece of transactional information available as property management software continues to evolve so that multifamily leaders are armed with the right information at the right time to make crucial business decisions.
By comparing market-wide lease trade-out − the difference between old achieved rent and new achieved rent for a unit by type − investors can better determine how much of the change is driven by property improvements.
“The challenge we’ve had in evaluating an ROI is pulling out normal market growth and determining how much of the difference in rent achieved by the renovation is actually attributed to upgrading the property,” Bowen said.
He pointed to a recent upgrade of a Class C asset that commanded a $200-per-unit monthly increase to close the gap on a nearby Class B property. In a review of transactional data, lease trade-out growth for the Class B, which had no renovation, grew $15 per unit per month. Applying that same rent growth to the Class C property, the net rent improvement to the investment on the upgrade is $185 per month. In this case, the ROI proved out in 27 months.
On the contrary, spending the same money for all units when only one-bedroom apartments are experiencing positive lease trade-out could drag out the ROI when considering other unit types, like studios and two-bedrooms.
“An analysis of the lease trade-out through business intelligence benchmarking allows us to understand if (a renovation) is worth it or not,” Bowen said. “It also allows you to drill down into how each unit is performing. Maybe that renovation is well worth it on the one-bedroom but we’re only seeing a $75 increase on the two bedrooms. The market is doing well, but we’re not really seeing a premium for the renovation there. We might want to focus our capital spend into the one-bedroom, where we’re really getting the return.”
Comparing renovation costs to increased revenue at the unit level
CWS Capital Partners, LLC, will spend $30 million this year on renovations across 65 properties or 25,634 units, says Senior Vice-President, Director of Operations Marcellus Mosley. The Austin-based company has developed special tools within RealPage’s business intelligence software to create automated reports showing comparison of renovation costs to increased revenue at the unit level. The reports are quickly created and accessible by employees across the business − allowing for increased transparency into performance.
Before installing the software, CWS accountants spent hours compiling and vetting data before distributing to company leaders.
“In short, we were able to extract aspects of what was happening locally in terms of cost and quickly pair that information against revenue impact.” Mosley said. “The end result was a summarized format for executive use with more granular, transactional information by unit for easy drill-down among asset managers, regional managers, and community directors.”
Mosley said CWS has deployed business intelligence software in the last 10 months to get concise, accurate and timely looks at not only renovations but operational aspects. The wealth of market data is used for forecasting and benchmarking, with accessibility by key stakeholders, and countless hours have been saved. “Renovation reports that used to take us hours are being produced in 13 seconds with a higher degree of accuracy and no impact on the community director’s normal course of work.”
Multifamily industry no longer limited on getting true ROI picture
Bowen said the apartment industry is no longer limited in drilling down on investment returns. The technology speeds older, slower accounting practices of tracking job costs and rents and dives deeper into market performance. For years, the lack of real-time market data and benchmarking made it difficult for investors to see exactly where they stood. Now, a complete picture of the rent roll is available based on accurate information, not subjective survey data, Bowen says.
“You’ve never really been able to understand how a market is moving,” he said. “We’re dependent upon asking rents, and we were collecting survey data, but it only considered the new lease side of the equation, not the renewal side of the equation. That’s where benchmarking has changed that game completely.”