Editor’s Note: The following report is an outtake from recent analysis by CoStar’s Property and Portfolio Research (PPR) subsidiary.
Now that apartment fundamentals have fully recovered and pricing is a mere 3% off prior peak levels, investors playing in this asset class need to be very smart in order to get healthy returns. Those with the best-informed assumptions will make the most successful decisions.
And when calculating top-line revenue potential, it's important to understand what renters appear to be willing to pay for, but also important to know exactly how much they are willing to pay for each individual attribute independent of others.
We have flexed our data muscles and mined nearly half a million apartment data points to quantify just that.
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Generally speaking, renters appear to be more willing to fork over big bucks for a piece of the downtown action that allows them to leave behind the hassle of long commutes (see Exhibit 1).
At 35%, the premium for a CBD location is more than double the bonus garnered by the next-highest characteristic, and that premium increases to 50% if the property offers proximity to mass transit.
A building’s green rating is also important, although the high correlation is probably also explainable by the high quality of materials, newness, and superior level of finish that LEED-certified properties tend to offer.
Not surprisingly, a new building commands more rent than an old building, and renters will pay more for premium interior finishes than site amenities, though fitness centers, along with washers and dryers, provide enough in the way of creature comforts that they bring their own incremental income benefits.
However, real estate is local, and renters’ willingness to pay varies dramatically by region (see Exhibit 2).
In an effort to eke out every additional dollar of income, developers and investors are piling more and more amenities onto new projects or renovations, either to justify rents that are required in order to make a project pencil or to exploit their tenants’ demands for more creature comforts.
But the value of site amenities and high-quality interior finishes varies by region and may not offer the kind of return on investment that is being assumed. New and nice pays relatively less in the Northeast, Mid-Atlantic, and Northwest.
In fact, in the Northeast, all of the fancy amenities will be a drop in the bucket compared to a transit-accessible downtown location. Owners of properties in these ideal locations will see less benefit in making significant property upgrades.
This is in stark comparison to the preferences of renters in the South and West. Tenants in these regions clearly prefer new properties with all of the bells and whistles, because those amenities command more than double the premium that can be attained through location alone.
In fact, investors placing bets on location alone may be disappointed in these low-barrier markets. Of course, every market, submarket, and micromarket has its nuances, and this analysis just scratches the surface of the decision-making power that PPR’s data and expertise can give our clients.