Study: Building More Social Amenities Actually Makes An Apartment Building Less Valuable
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Apartment buildings with more social amenities, such as pools, fitness centers and clubrooms, have sold for significantly less than those with fewer social amenities in a major U.S. market over the last five years, a new study shows.
Newmark Knight Frank studied all 124 apartment buildings that have delivered in the last three years and all 26 communities that have sold over the last five years in the D.C. Metro area and detailed the precise impact different levels of amenities and designs had on rent, lease-up pace and sale price.
The most striking conclusion, Newmark Knight Frank Senior Managing Director of Market Research Greg Leisch said, was that buildings with five or more social amenities sold for $31,867 per unit less than projects with four or fewer social amenities. The most common social amenities it found were fitness centers, meeting and party rooms, pools, rooftop lounges, dog runs, fire pits and indoor and outdoor athletic courts.
The report concluded that apartments with fewer of these social amenities actually sold for an average of a 7.6% premium over those with more social amenities.
"That was the surprise to us," Leisch said. "We thought it was common sense that the more social amenities a project had, it would probably fetch a higher sale price."
Service amenities such as package delivery, front desk concierges, pet services and valet parking had the opposite effect. Projects with four or more service amenities had a 4.5% sale premium over those with three or fewer.
Leisch attributes this difference to the cost of installing and operating social amenities, and the larger footprint they consume in a building that can reduce the number of units. Additionally, tenants often do not pay extra fees for using a building's pool or gym as they would for a valet parking service, so the costs of social amenities go straight to the project's bottom line.
Investors tend to become wary when they see higher operating costs and less square footage devoted to rentable units in an apartment building, Leisch said, and would then want to bring the price down accordingly. This means that developers looking to sell apartment buildings should not go overboard on social amenities, but Leisch said they still have to provide some to attract tenants and achieve high rents.
"If you're a merchant builder and you don't hold for the long run, the art of that business model is you need to pick a real sweet spot of three or four of these social amenities, especially those that don't cost too much to maintain," Leisch said.
Examples of developers who tend to be merchant builders in the D.C. area are MRP Realty, Jefferson Apartment Group and Insight Property Group, while firms such a Bozzuto, Kettler and Foulger-Pratt tend to hold buildings for the long term, Leisch said.
For long-term holders, installing more amenities is well worth the investment, NKF's report found, because of the impact on lease-up pace and rent. Projects with eight to 13 total amenities earned a 5.1% rent premium and leased up 5% more units per month than those with seven or fewer amenities.
Adding more social amenities did not have the negative effect on rent prices that it did on sale price, generating a 4% premium, but service amenities still proved more valuable with a 6.9% premium.
NKF's report also found well-designed projects earned significantly higher rents and leased up faster than those with poor-quality design. For this analysis, researchers worked with Hartman Design Group President Phyllis Hartman, who looked at each of the 124 buildings and rated them based on the attractiveness and visual personality of the apartment building.
Hartman characterized 41 of the 124 buildings as well-designed. Of those 41, 15 had at least three service and three social amenities. These "elite" buildings, as the report describes them, include The Apollo on H Street, The Hepburn near Dupont Circle and The Bartlett in Pentagon City. The 15 well-designed and well-amenitized buildings achieved a 17% rent premium and leased up 23.1% faster than the average building.
Given how financially advantageous it is for projects to be well-designed and highly amenitized, Leisch said he was surprised only 15% of projects have been built to that level. He said no researchers have gone to this level of detail on the tangible effects of design and amenities in the D.C. market, and he expects NKF's report will persuade developers to invest more in those qualities.
"There should be a higher ratio of projects that are well-designed and amenitized because the payoff of 17% rent and 23% pace is enormous," Leisch said. "Here is the empirical evidence that it pays off."