Landlords are again investing in apartments as market improves

With the market for apartment rentals steadily improving, some multifamily-building owners say they are taking the opportunity to make much-needed upgrades to their properties to reposition them for a more competitive future.

While installing new kitchen cabinets, appliances, flooring and bathroom fixtures isn't cheap, it's proving financially workable, partly because strengthening demand is allowing landlords to raise rents to help pay for the upgrades.

And that, in turn, is allowing building owners to recruit more prosperous tenants who up until recently may have opted to buy a condominium but who now view rentals as a smarter move.

The latest numbers show continuing recovery in the apartment market after the housing boom had thrown it into a downspin in the final years of the last decade.

A report issued by GVA Marquette Advisors of Minneapolis indicated that although renters remained bargain-hunters looking for the best possible deals, more were signing leases at the mid-point of 2010. The Twin Cities' vacancy rate for apartments was down from 6 percent in July 2009 to 5 percent this year -- a situation credited to the creation of 13,500 jobs in the metro area in the second quarter.

GVA estimated this has resulted in the absorption of 3,500 apartment units in the first half of the year -- meaning thousands more units were rented than became vacant in the last six months. Some areas of the Twin Cities market have been able to sustain modestly increased rents.

The improved fundamentals, however, have also sharpened competition among multifamily-building owners angling for the new tenants. The new breed of renter is looking for the kinds of amenities he or she may have received in new condos: new countertops, new appliances, sparkling common areas. That has prompted one prominent local apartment owner to embark on a major renovation effort for some of its properties.

"The recovery in the rental market is allowing us to reinvest back into our properties," said Armand Brachman, Dominium's managing partner. "It's much more financially feasible for us to fix up our existing units than it is to try to go out and build new buildings."

Brachman said the uptick in what can be charged for rents is allowing Dominium to replace obsolete equipment. For instance, at Tralee Terrace Apartments in Coon Rapids, where Frerichs Construction of Vadnais Heights is carrying out an $800,000 job, Dominium is investing $17,000 per unit for upgrades.

He said upgrades in various complexes include such things as replacing windows, patio doors, roofs, drywall, kitchen cabinets, countertops and appliances.

Also being tackled are buildings' common areas, where carpet is being replaced, and in some cases, community rooms are being added. And it is replacing aging mechanical systems with new, energy-efficient equipment.

"We're conscious about going green and saving energy," Brachman said. "Heaters and boilers that are 15 to 20 years old aren't going to save you any energy costs. We owe it to our residents to maintain the properties, plus we can stay competitive in the long run."

"You can do some minor exterior renovations to enhance a property's 'curb appeal,' which I think is very important in a competitive market," he said. "If you look at most apartment communities today, you'll see that they've done that."

Up a level is replacing flooring and fixtures. "With something like that, you'd be looking for minor rent increases of about $30 to $50 per month, and I think the market has improved enough in many places where you'd actually see a return on that kind of investment."

A third kind of renovation would be a major remodeling meant to entirely reposition a rental complex, including new appliances, which can cost as much as $5,000 to $7,000 per unit.

"Those are major repositioning plays, and most owners looking to do that will need some kind of financing," he said.

Timberland is performing an ongoing renovation project at its 231-unit Burnsville property, The Observatory. There the company is carrying out $1.7 million in upgrades to the units as they turn over, including replacing kitchen cabinets. The building is also undergoing an exterior freshening, Fransen said.