Using Revenue Management to Determine ROI on Renovations in Multifamily

As discussed in RealWorld 2018 sessions 

Rehabbing a property no longer means applying a fresh coat of paint on the outside and new carpet throughout. In today’ highly competitive multifamily world, an upgrade is sometimes the complete transformation of an asset, down to the studs. Renovations in multifamily are the new reality and they are visible around the country and across asset classes.

“It is the new norm in our business, it’s clearly the new norm,” LRO Vice President Tracy Paulk said at RealWorld. “Twenty percent of the properties that we do business with are under renovation. It’s not isolated to one part of the country, it’s all over.”

The “amenitization” of multifamily is leading the charge and defining how developers and property management companies orchestrate their portfolios. In a renovation, apartment operators have to find the balance between an amenity investment or upgrade that promotes rent lift and a sound trade out compared to one that’s just money down the drain.

The big question is, how do you calculate return on investment through the renovation process when rental rates are a moving target?

Revenue management and business intelligence are providing many of the answers. Slowly but surely, multifamily is adapting to the coexistence of property renovations and the deployment of revenue management. With increasing demand to know the true impact of amenities − how upgrades like granite countertops truly affect the rent roll − monitoring renovation performance and staying focused on ROI is key.

Using revenue management for renovations has become an effective way to chart performance so investors and managers can walk away with the knowledge to make key decisions for a portfolio or property.

Combining data science with revenue management

Revenue management for renovations is combining the same market rate data that’s been its signature for 15 years with data science to determine ROI. RealPage Data Science is relying on the company’s revenue management market penetration from more than 13,000 communities in the U.S., Canada and U.K. to extract amenity data and how renovated units compare to Legacy apartments by comparing leases, days on market, trade-out and rent roll lift.

Executed rents and trade-out data at the submarket level offer clearer insight into return on investment for renovations. Investors can better determine how much their improvements are driving up rents at the bedroom level by comparing their achieved rents to those calculated for the local submarket. The data has never been as granular, as accurate, or as accessible as it is today through the RealPage platform.

An analysis of the lease trade-out through market data benchmarking helps determine if a renovation is worth it or not. The data allows drilling into performance unit by unit type. Benchmarking of all can determine if the lift is driven organically by a rising submarket or is a result of capital investments in the asset.

To see how revenue management can be applied to renovations, some setup is required within the property management system, including adding new unit types and specifying amenity descriptors, just to name a few.

Paulk said there are three basic phases to monitoring renovation performance – starting with a plan, monitoring progress and following through once the ROI is established.

The property must take into consideration the physical scale and scope of the renovation program, what pressures may affect the movement of the program, scheduled down time for each unit term and budget for occupancy levels that reflect extended turn times as appropriate.

Within determining the scale and scope of the program, things like how many units are involved out if Legacy units will continue to lease should be considered.

Along the way, turn times and the competitive position of floor plans should be regularly reviewed, days on market monitored, determine periodically how many units are off line and stakeholders informed.

“As you’re planning and thinking about the scope of the project, not just what kind of floor or refrigerator you’re putting in, consider the bigger picture you’re thinking about,” Paulk said. “At the end of the day, you need to drive more and different traffic to the property just like it was a lease-up. You need more people to walk into the door because you have invested money.”

RealPage is providing more analytics to help properties determine the real story on ROI that previous revenue management couldn’t always do.

Study of Florida property reveals power of benchmarking

A study of a 528-unit community along Florida’s west coast revealed the power of applying benchmarking through revenue management to renovation of one and two-bedroom legacy, partially renovated units and full upgrades.

Benchmarking current market rates with comparable units in the market down to bedroom size, minus any market growth, determines lift a property could expect from a renovation premium.

Based on current rates, the Florida property, with 20 percent of its units renovated, first showed a meager return on investment. However, a deeper dive and benchmarking against other one bedrooms with similar upgrades in the market the return on investment was actually about 50 percent.

“From the first analysis it looked like they weren’t doing very well on (the one bedroom) but with the other ways we looked at it they were,” said RealPage Vice President of Asset Optimization David Danish. “It turns out they were crushing it. When you subtract out the 11 percent growth we saw in the sub market, they were still at a 39 percent lift and that’s much higher than they had underwritten. It was a huge success.”

The two-bedroom renovation performed above expectations as well.

“With our research they were able to validate that they were doing great across this property and that they should continue to invest in this renovation program because it has a solid return,” Danish said.

The difference is the new approach to utilizing a tried and true tool in property management. The days of apartment operators evaluating needed lift on renovations, based on speculation within the industry or inconclusive data, has changed.

“What people have done on the past to evaluate the lift on their renovations doesn’t actually give you an accurate picture of whether they are performing or not,” Danish said. “RealPage has the tools to get you a generation closer to having a perfect answer to the question, ‘Am I getting the value out of my renovation.’”

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