“Why Renovations Work in Rent-Controlled Multifamily”

Not too long ago, the standard renovation package for upgrading a unit in a rent-controlled apartment building (one that was built on or before October 1, 1978) in Los Angeles was $5,000 to $10,000 per unit. Slap on some linoleum flooring, a coat of paint and some new cabinet door knobs and call it a day.

Stepp Commercial’s Mark Ventre observes that while some owners may still be able to get away with this in certain buildings, many buyers are now budgeting upwards of $50,000 per unit in interior renovations and upwards of $15,000 per unit in exterior and common area upgrades on their rent-controlled apartment assets. Ventre shares insights into the trend of improving rent-controlled apartment properties in Los Angeles to maximize value for investors in Connect Media’s latest 3 CRE Q&A.

Q: If the property is in a prime market like Brentwood or Santa Monica, it seems to make sense to invest in significant improvements, but what about secondary markets?  

A: With a tight rental market throughout the county, even in emerging LA markets like Boyle Heights and MacArthur Park, owners renovating to institutional specs are able to achieve at least a 20% return on cost upon stabilization. There are plenty of tenants seeking out high-end repositioned product, and they are prepared to pay premium rents.

 Q: Can you provide numbers on how upgraded versus non-upgraded rents differ?

A: The average in-place monthly rent for a one-bedroom in Hollywood in a rent-controlled building is $1,350. The average asking rent for a one-bedroom in a similar building that has been completely repositioned is $2,195. That is over a 60% increase, and is still drafting considerably under newer non-rent controlled units that go for $2,650 … and that is light years under the recently built luxury one-bedroom projects that start at $2,850 and can go as high as $3,500.

 Q: What are the long-term benefits for owners who make significant capital improvements in their rent-control assets? 

A: While the tenant profile for newer versus older buildings might be different today, the economic future is never certain. These older renovated units are well-positioned to hold long-term value and snag a slice of the high-end market share from tenants wanting to continue living in the same quality units, while saving upwards of a thousand dollars a month.

Connect with Mark Ventre:

310.774.3834 / [email protected]

Original article on Connect Commercial Real Estate