It is no question that a quality renovation equals increased revenue for owners and managers of multifamily units. But, did you know that the speed of the renovation project could actually maximize your profits? The quantity and frequency in which units are released to the contractor for renovation (i.e., unit flow) greatly impacts the earning potential of a renovation project.
The concept is often referred to as the “rush hour effect.” In busy times on the road, cars moving at the same pace means that everything is functioning at peak performance, and everyone is arriving on time to their destinations. However, it just takes one car slowing down or stopping altogether to negatively impact the entire flow of traffic, causing frustrating delays, angry drivers and even costly accidents.
The same is true in a renovation project, where a steady flow of renovation work equals a smoother project overall. In a typical situation, a low unit flow strategy generally involves releasing units as they become available, averaging around five to 10 units per month. Although releasing units as they become available may seem like a safe bet, it’s often riddled with costly delays and increased stress and tension among tenants.
“Low unit flow is used to maintain corporate and co-investment minimum property occupancy expectations,”explains Priscilla Burney, operations compliance manager for Katerra. “On paper it looks better to be making money than spending it, but releasing small batches of units, or units at an inconsistent rate, keeps the ‘expensive’ units off the market and maintains occupancy expectations.”
Low unit flow budgets are created without low-volume materials’ pricing, where labor demand premiums and overhead burdens can further degrade a renovation project schedule and budget. Additionally,low unit flow can result in sporadic quality due to new labor crews and inconsistent material deliveries.
On the flip side, a high unit flow strategy typically involves releasing 20 or more units per month for renovation, and often includes occupied renovations where the tenants remain in their units during minimally invasive upgrades and updates.
“High unit flow and occupied unit turns can maximize returns on renovation investment by reducing construction schedules,” Burney adds. “Along with volume and frequency, the investment is less with the same return as with low unit flow release. High unit flow benefits also include labor satisfaction and continuity, which has shown to result in maintained quality over time.”
This renovation strategy means projects are completed more quickly, allowing owners and managers the chance to get ahead of upcoming new development competition, but it also means savings in general construction conditions as the shorter timeframe construction crews are on property, the less overhead is required across the project budget.
“In this industry, time is money, and the less time spent on the project, the less money property managers and owners have to spend,” says Chad Paxton, director of operations for Katerra. “If you can shave off time, you’re going to save money. For instance, on a 300 unit property, renovating 10 units a month will take you 30 months. Overhead will end up costing you close to $80,000 per year, so you’ll end up spending $200,000. If you released more units per month you could do the project in half the time and save $100,000 overall, not to mention the cost of anything billed monthly, like storage containers, safety fencing around the property, dumpsters, temporary lodging and more. If your units were costing $8,000 per door to renovate, that means freeing up 12 free units.”
Keeping Heads In Beds
“The number one goal from the day you build and the day you sell should be keeping heads in beds,” Paxton advises, noting that the problem most property managers and owners face is finding the time to renovate their empty units while still focusing on keeping occupancy rates high. “You want your building as full as possible, which is why I always recommend doing a mix of occupied renovations while also renovating the unoccupied units.”
The obvious catch to doing renovations while tenants are present is the possibility for disruption of their quality of life. It’s hard to sell a renter on the benefit of finishing the renovation project in 12 months instead of 24 without risking losing them when it comes time to renew their lease, so the trick is to sweeten the deal for them with a few incentives and concessions.
Katerra is offering another alternative to owners, occupied unit renovations. By taking this unique approach, owners can ensure occupancy while also gaining rent increases without unit downtime. To support this strategy, Katerra offers door to door marketing, resident planning and town hall meeting support on their projects.“The more you communicate with your residents, the more they will get excited to be part of the project,” Burney says. “With proper marketing, you could have people clamoring to relocate to a renovated unit,freeing up batches of units at a time. Communication and marketing is key for successful high unit flow projects.”