Two wonderful songs, one speaks to the present, one to the future. As property managers and investment real estate owners, we all know the present. Rents are up, vacancies are down, and interest rates continue at historic all-time lows. But what about tomorrow?
Most of us today are giddy with the wonderful feelings that come with growth markets. Things have been so good for so long, I am starting to hear the same predictions I heard before the last market correction in 2008. Many are again predicting the good times will never end. Real estate in the Seattle area has been on a 10-year market cycle for the last 60 years. We are now five years into a good cycle and the only question is not whether we will have a market correction but when. Rents will stop increasing, vacancies and rent concessions will again be the new “norm”. When is anybody’s guess however, as contrarian as I may sound given the unbridled exuberance in the market place, my bet is the peak may be closer than some would want to believe.
Rents this year are not expected to grow as much as last year. They are projected to grow less next year and perhaps even decline in 2018. Expenses of course will continue to climb driven by higher property taxes and utility bills. What is an owner to do? As I drive around and look at properties I am surprised at how many units have lost their luster. Are the units clean and serviceable? Yes. Are they at their best? Certainly not. It’s difficult to convince owners to spend money updating units when every time a unit becomes vacant, the phone rings off the hook. Now is the time however to plan and execute property updates. When the correction does happen, the building with the nicer units will rent first, bring the higher rental rates, and require the least amount of concessions. Updated units will attract better tenants and maintenance, turnover, and vacancy will be less.
A complete unit update, including new carpets, paint, cabinets, lighting, new appliances, and flooring will average $15,000. Typically we can obtain $250-$300 rent increases and when the savings on maintenance is added, the cost for updating a unit will pay for itself in three to four years. Another bright note is that the investment will return $84,000 at today’s low cap rate should the property be sold. Multiply that times the units in a building and the path is clear.
One other very important area to pay attention to is the exterior and common areas. Curb appeal means so much to new tenants. They will pay more to live somewhere they can be proud of. Protect your investment and protect your future. You will be glad you did!
About the Author
Bruce A. Kahn, CCIM, CPM is a Managing Director of The Foundation Group Investment Real Estate Solutions, a full-service property management and brokerage company. He has earned the designation of CCIM (Certified Commercial Investment Member) issued by the CCIM Institute, and is a CPM (Certified Property Manager) with the IREM (Institute of Real Estate Management). For further information or for a property analysis, please contact him at 206-324-9424 or by email.