Re-investing in renovations

With stronger rental market, landlords put capital toward home improvements again

Jun.June 30, 2011 01:53 AM

423 East 81st Street
An apartment at 423 East 81st Street before and after a $45,000 renovation.
At the height of the recession, New Yorkers could rent deeply discounted apartments without paying brokers’ fees, but found that aging appliances and scuffed hallways were often the norm.

Those days are over. Now, landlords are courting renters with granite countertops and new, stainless steel appliances — in exchange for higher rents, of course.

With the market bouncing back and renter incentives disappearing, many landlords are ramping up renovations at their buildings, after several years of avoiding major capital projects. With rents rising, the economics of renovations make sense again.

“We’re definitely doing more improvements, the market is definitely back, without a question,” said Leor Sabet, the owner of the Sabet Group, which manages thousands of residential apartments nationwide, including a number of buildings in New York City.

Sabet said the firm’s New York properties are now achieving 10 to 20 percent higher rents, due in part to improvements like new appliances, marble bathrooms and refinished hardwood floors.

Start with the kitchen

Two years ago, the rental market in Manhattan was suffering. To keep their buildings full, landlords routinely paid brokers’ fees, rather than having tenants paying them, and threw in one or more months of free rent.

Now, New York City rents are recovering. According to Citi Habitats’ May market report, the average Manhattan rent was just 1.2 percent below the 2007 peak. As a result, renter incentives have virtually disappeared from the market. Out of 6,000 apartments in the Citi Habitats New York listing database, only about 10 percent — 603 apartments — offered incentives last month, according to Matthew Berkson, a senior associate broker at the firm. That percentage may be even lower in tighter markets like Chelsea or the West Village, he added.

With more cash rolling in and landlords free from the burden of paying brokers’ fees, they are more likely to upgrade their properties.

“When you don’t have that expense, you can really put [money] back into the buildings,” Sabet said.

According to the New York City Department of Buildings, alteration permits in residential buildings rose 7 percent to 38,815 in 2010, after falling 4 percent in 2009.

“Landlords are [clearly] more willing to invest in renovations,” said Danny Moyal, a senior vice president at Citi Habitats.

Newly refurbished apartments command higher rents, especially in a tight market. And when an apartment is newly renovated, a tenant generally stays longer. That helps landlords save money, according to Joseph Sbiroli, principal of Ventura Land Corp., which manages just over 1,000 apartments in the city.

Last year, for example, Sabet renovated 464 West 23rd Street. A large one-bedroom in the building, 4R, used to take four to 10 weeks to rent for around $2,400 per month, according to Citi Habitats listing agent Jason Saft. But in November, after Sabet redid the bathroom and added stainless steel appliances, as well as a washer-dryer, to the kitchen, the unit rented in just five days for $2,995 without any incentives. Without the renovation, the unit would likely be renting for around $2,500 per month, Saft estimated.

The kitchen is the most important thing for landlords to upgrade in an apartment generally, followed by the bathroom, according to Moyal, who works on the Upper West Side in brownstone apartments. The presence of brand-name appliances are not as important to renters as they are to buyers, brokers said, but granite countertops and stainless steel, not white, appliances are important.

Thus far, most landlords are focusing on renovating individual apartment units rather than common spaces in buildings, like hallways and stairwells. But those larger, pricier renovations will likely increase as the market improves, according to Halstead Property Vice President Michael Bergen.

“Right now, [landlords] seem to be more focused on the apartments themselves, but down the line they’re looking toward that,” Bergen said.

Moyal is already seeing this in some buildings — one of the landlords he works with has recently undertaken a $100,000 renovation of the stairwell in a brownstone at 28 West 75th Street.

Cashing in on the investment

There are other compelling reasons for rental landlords to renovate their buildings. For one, many apartments in new condo towers built during the mid-2000s boom are now available for rent. That means renovations and improvements are crucial for older rental buildings to compete.

“A lot of the rental buildings needed to renovate to compete with those condos that didn’t sell,” said Gordon Golub, executive vice president and director of rentals at Citi Habitats. “The condo buildings have gorgeous finishes in the apartments and they have much grander lobbies or gyms or common areas.”

Sbiroli said that he’s always done a lot of renovations and improvements, even during the downturn. But he has an added incentive now that the sales market seems on the road to recovery: the potential of selling the buildings or converting them to condos or co-ops down the line.

“What’s different now, as opposed to two years ago, is we take it to the next level,” said Sbiroli, who converted several Flushing buildings in the 1980s. “These renovations are done not just with a higher rent in mind, but with a conversion in mind.”

At 423 East 81st Street, for example, Sbiroli did a $45,000 gut renovation on a fourth-floor unit — entirely redoing the bathroom, kitchen and fireplace, as well as adding hardwood floors and even a wall. The apartment, 4RW, previously rented for $1,460 and ordinarily spent 30 to 40 days on the market. After the renovation, it rented for $1,689 after two weeks on the market.

“This is one of those times where the renovation is not justified by the bump in rent,” Sbiroli said. “I could have spent $15,000 to get the same rent or maybe $100 less, but that renovation is really an act of faith based on where the market will be in a couple of years and on the conversion value.”

The renovation has doubled the potential sale value of the apartment, Sbiroli estimated. “That’s the real bang for your buck,” he said.


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