The millennial generation’s continued delay of homeownership is old news for today’s apartment owners and developers. But because young adults are continuing to rent into their 30s, landlords continue to see the demand for amenities rise to unprecedented levels.
Millennials want resort-style living, and they’re willing to sacrifice personal living space and pay higher rents to get the amenities they crave. Today’s developers and owners are now upping their amenities game to get the 25-34 crowd to continue renting at their buildings.
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Tenant-oriented amenities have long been a focus for property owners. In pre-recession days, amenities likely centered around clubhouses, workout rooms and courtyards with grills. But since 2009, the amenities race has accelerated. Those developing new projects—or completing a major redevelopment of older projects—are tailoring the amenities in those buildings to add extras in the areas that renters are most focused on: convenience, technology, speed and flexibility. Just as retail owners and developers are finding, it’s all about the experience.
The lifestyle choices and preferences are being addressed by the addition of a range of sometimes extravagant amenities, from coffee shops and shared workspaces with high-speed Wi-Fi to theater rooms to indoor dog runs. Additional amenities growing in popularity include multi-purpose rooms for art and cooking classes, gardens, play rooms for children and concierges.
While these modern amenity packages are increasingly popular, they also come at a premium—to develop and/or install. Yet surveys suggest that renters are willing to pay up to 30 percent more to live in a building with a host of these features.
Some tenants are willing to sacrifice square footage of their personal living space to get the amenities that are most important. Further, to cover the cost of amenities, some owners and managers may charge an amenity fee, similar to the association fee condo owners might pay.
By being able to charge more in rent or other fees, building owners will be able to recoup the costs required to develop and maintain the amenity space. While it’s certainly no guarantee, the ability to collect fees and offset costs likely will translate to higher property values when an owner goes to sell the property.
The value of amenities
One of the natural and very logical questions to be asked is what is the general value of amenities? And for value-add properties, will adding amenities provide a higher ROI at the time of sale?
According to market research, some surveys suggest that renters may be willing to pay up to 30 percent more in rent for an amenity-rich building. Consider that an average rent for an 800-square-foot unit in a building that lacks the desired amenities is $2,000 per month. Compare that with a similarly sized unit in an amenity-laden building across the street that may receive up to $2,600 in rent.
Assume the property features 250 units at $600 more in rent per month, which would equate to additional revenue of $1,800,000 a year in gross revenue. Deducting an estimated 35 percent for expenses would result in a net operating income (NOI) of $1,170,000. Given the historically low cap rates seen in the downtown area of let’s say 5 percent, that would equate to an added value of $23,400,000 in value just for the additional rent for amenities.
Of course, this would have to be compared against the cost of the amenities, the long-term capital improvements required for upkeep/maintenance and the ability of ownership to consistently achieve this increase in monthly rents. While determining exactly how many amenities add to a building’s overall resale value is a little more complicated than the streamlined answer above, there’s no question these amenities can boost sales prices.
At the same time, however, there may be a ceiling to what renters will pay even for the most top-of-the-line amenities. It is important for owners and future buyers to account for that, and not have a level of amenities that could price them out of the market.
Despite the recent heightened desire for high-level amenity packages, there are still renters who don’t want to pay higher rents for all of the bells and whistles included in some apartment buildings. In apartments that are more than 30 years old, developers may consider leaving the units at a larger size and offering just a base level of amenities to draw in renters who are looking for lower costs of living.
And developers will be able to benefit from the added luxury even if the apartment market turns downward. When oversupply depresses rents, renters will choose a building with amenities over one without, so buildings with more to offer will have fewer vacant units. This will benefit building owners in the near future as rent escalations begin to level off.
About the author
Anthony Mulé is a Director of Real Estate Analysis with the Chicago office of Valbridge Property Advisors. Earlier this year he earned his MAI designation from the Appraisal Institute. He also has been recognized as a CRE Future Leader.