By Nellie Day
Today’s multifamily investment market can feel like a three-ring circus thanks to leveled-off rents, increased costs and more competition in many regions. Performers in this circus are often walking on a tightrope.
On one side, there are repairs to be made and renovations that can lead to justified rent increases. On the other side, costs and reality must reign supreme.
“Pre- and post-COVID markets have forced an evolution when it comes to investing in an asset,” says Sarah Connolly, vice president of operations at Capital Square Living in Glen Allen, Virginia.
“Owners now have to ask themselves, ‘What is actually going to bring a return, and what should be incorporated into programming due to muted rent growth?’”
It’s a challenging landscape, to be sure. National rent growth has slowed down significantly, with year-over-year increases hovering around 1 percent as of late 2024, according to the fourth-quarter multifamily report from Apartments.com. This is a stark contrast to the double-digit surges posted in 2021 and 2022.
At the same time, construction costs have escalated, with Crescent Insurance Advisers noting that the average cost of building a multifamily property is about $398 per square foot. For context, the national average construction cost for an eight- to 24-story apartment building in 2019 was about $227 per square foot, according to RSMeans data. This represents about a 75 percent increase in the cost to build multifamily product over the past five years.
The unpalatable mixture of slowed rent growth and rising expenses has caused many owners to re-evaluate their renovation strategies going forward.
“The focus has shifted from costly renovations to cost-effective, high-impact improvements and asset preservation to maintain value,” continues Connolly.
“Reductions in new-lease rents and increased concessions — even in otherwise stable markets and assets — create uncertainty around achieving the full premium and return projections tied to renovations.”
Still, the renovation show must go on at many properties. That is, it must if the owner’s goal is to add value, fill vacancies, raise rents or keep up with the competition.
Assess the Address
Brennen Degner, co-founder and CEO of Denver-based multifamily investment firm Platte Canyon Capital, knows that many investors have worn their pencils down to a nub trying to make the numbers work in today’s market.
“The biggest challenge is the compression of margins,” explains Degner. “Renovation costs remain elevated, while rents in many markets are flat or declining. That math puts real pressure on underwriting. When evaluating a property for renovation or repositioning today, the process is a blend of art and science and continues to evolve as market conditions shift.”
Dylan Simon, executive vice president and co-founder of the Simon | Anderson Multifamily Team at Kidder Mathews in Seattle, is also leading with math when assisting his clients in evaluating a value-add opportunity.
“The first consideration is simply, what can they afford to do?” he says. “From there, we look at how much additional rent revenue they can generate from those upgrades.”
Simon believes a renovation is worth carrying out if the investor can garner a 20 to 30 percent return on his money. He notes that a typical full-unit remodel on an older building might cost around $15,000. If the investor can achieve a $250 monthly increase in rent (about $3,000 more per year), that’s about a 20 percent return.
“That means you’d recoup your investment in five years,” he adds. “So, if someone is spending $15,000 and generating $3,300 in additional annual income, that’s the basic math we’d look at to determine if it pencils.”
Of course, this number can vary, although Degner also prefers to underwrite to a 20 percent return on cost for revenue-generating upgrades.
“Our underwriting breaks down the business plan into its revenue components,” explains Degner. “If we believe the market supports a $200 rental increase, we challenge ourselves to attribute each portion of that uplift to specific initiatives, such as flooring, appliances and amenities. This forces discipline and makes the team defend each dollar of spend. While our framework hasn’t changed dramatically, what has shifted is the margin for error.”
Noah Kaufman, director of finance and acquisitions at Los Angeles-based Universe Holdings, has a similar approach — one that is more frequently overheard in an operating room than in an apartment building.
“We’ve become more surgical,” he says. “This process has definitely evolved over the past few years with rising construction costs and more selective capital.”
“Today, our focus is less on ‘transformation’ for its own sake and more on return on investment (ROI)-driven improvements that align with what the market will actually pay for.”
To achieve this goal, Lindsey Romano, senior vice president of asset management at AvalonBay Communities, notes that her firm closely analyzes its market position and defines where it wants to land post-renovation, all while ensuring each project meets or exceeds a minimum 10 percent return on cost.
“We begin by assessing the remaining useful life of existing features, identifying which elements are driving recurring maintenance or redecorating costs and exploring opportunities to enhance layout functionality,” she adds.
History and data should play large roles in answering the what, where, why, when and how of a multifamily renovation strategy, emphasizes Zach Dovner, vice president of acquisitions and general counsel at Eastham Capital in Boca Raton, Florida. Fortunately, most of this information isn’t hard to obtain.
“Our approach heavily relies on the rent roll as a proof of concept,” he says. “If a few previously upgraded units are showing a premium over classic units, we have the confidence to widen the scope. Our process has become more disciplined and data-driven in today’s tighter capital environment, so we prioritize improvements that clearly impact rent growth and occupancy.”
American Landmark Apartments also utilizes real-time data and cost benchmarks to guide decisions and remain disciplined.
“With rents trending flat over the past two years, we have spent a tremendous amount of time analyzing how much of a rent increase residents are willing to absorb, accompanied with the standard American Landmark upgrades,” says Christine DeFilippis, chief investment officer at the Tampa, Florida-based real estate investment firm.
Light-Touch Renovations Prove Successful
Yes, renovation strategies are shifting for many owners, particularly in slower or oversupplied markets. Instead of going all-in on upgrades just to raise rents, more are focusing on keeping their properties in good shape while reducing recurring costs.
Still, the argument can be made for either approach.
Deciding which route to take often comes down to what’s more likely to pay off, lowering operating costs through strategic maintenance, or pursuing rent increases through upgrades, even if the payoff is less certain.
Degner knows his answer — at least in this market.
“The broader trend seems to be a shift away from flash and toward function, as residents are prioritizing ease of living over aesthetics,” he says.
“Our strategy has been to focus on lower-cost improvements that enhance quality of life without materially shifting the rent band and alienating the existing tenant base,” adds Degner.
These lower-cost improvements aren’t so much a nice way of saying “lipstick on a pig.” Instead, they’re real enhancements aimed at stretching today’s dollars while keeping the needs of both current and future residents top of mind.
Simon gets it.
“In today’s environment — where everything is more expensive — we’re seeing more ‘light-touch’ upgrades,” he explains. “Small things can go a long way.”
When it comes to the biggest bang for the buck, Simon recommends new blinds, replacing cabinet hardware or swapping out traditional outlet plugs for ones with built-in USB ports.
“Right now, it’s a ‘less-is-more’ strategy because rents just aren’t growing fast enough to justify a major spend,” explains Simon.
Elie Rieder, CEO of Suffern, New York-based Castle Lanterra, says a paintbrush may be one of an investor’s most valuable tools today.
“One of the most cost-effective ways to update a space remains a fresh coat of paint in an updated color palette,” he says.
Connolly agrees that improvements like refreshed exterior and interior paint can go a long way as the industry shifts away from big, expensive overhauls toward cost-effective, high-impact fixes that preserve value.
In addition to paint, she recommends landscape improvements, mechanical upgrades and technology improvements that focus on the residents’ ease of access.
“Smart home technologies like keyless entry and smart thermostats provide inexpensive luxury features,” notes Dovner. “Most importantly, we avoid going overboard with expensive finishes that don’t move the needle in workforce housing.”
What does move the needle, according to Dovner, are improvements that add convenience and tiny glimpses of luxury.
“Adding in-unit washers and dryers to homes that previously relied on a shared laundry facility is a great example of a high-impact upgrade,” he adds. “The convenience factor alone supported rent bumps and increased lease conversion rates.”
In another instance, he notes that curb appeal and traffic from prospective renterswere “immediately enhanced” by simply rebranding a property and updating the signage.
“These experiences demonstrate that a well-placed, $10,000-per-unit update can sometimes achieve greater NOI with significantly less risk and downtime than a $20,000-per-unit full renovation,” he continues.
Kaufman also believes the strongest returns often come from improving livability and curb appeal. Aside from in-unit washers and dryers, this might include upgraded lighting or reconfigured community spaces that integrate grilling areas or dog parks.
“These kinds of updates have performed well for us,” he says. “They enhance the perceived lifestyle without pushing rents beyond what our resident demographic can afford.”
Those looking for other high-impact areas of improvement may want to start in the kitchen or bathroom.
“The two biggest areas for return are appliances and surfaces,” adds Simon. “Swapping out carpet for vinyl plank flooring (VPF), upgrading countertops and replacing older appliances — that’s where people typically see the biggest returns. Over time, appliances and flooring have consistently been the most reliable value-add strategies.”
The strongest ROI can often be achieved through a few strategic swaps, notes Rieder. Dated granite countertops can be replaced with quartz; black or white appliances can be switched with stainless steel; and, yes, VPF should take the place of carpet whenever possible.
“These [items] seem to be what most renters want and will pay premiums for,” he says.
From Strategy to Spend
Even the best-laid renovation plans can fall apart if owners don’t keep their eyes on the prize. In this market, however, the prize is more than rent growth. It’s staying on budget, completing the renovation on time with as little disruption to residents as possible and remaining attuned to renter preferences.
With this in mind, the goal isn’t simply to renovate — it’s to renovate efficiently and effectively, with clear guardrails around what’s truly worth the spend. For DeFilippis, there is one area that’s consistently worth the spend regardless of economic conditions.
“We will always repair deferred maintenance items,” she says. “The ‘nice-to-have’ renovation scope, meanwhile, depends highly on the market, rent tolerance in that market and what we are inheriting.”
Romano adds that no renovation is one-size-fits-all, even when it comes to the high-impact items. Instead, regional preferences should be a major consideration.
“Focus on design elements that resonate with local residents,” she recommends.
For example, ceiling fans can be a must-have in warmer climates like the Southeast or Southwest as residents rely on them to manage heat and reduce air conditioning costs. Tile shower surrounds may resonate more in coastal or urban markets, where renters expect a more finished, modern look.
Meanwhile, closet organizers tend to be in demand in densely populated or high-rent markets, such as parts of the Northeast or on the West Coast, where maximizing storage in smaller units can be a major perk.
For those items that can be broadly applied, such as VPF, owners should make sure their execution is flawless.
“To address the potential for increased noise transmission from hard-surface flooring, we conduct sound tests and install acoustical underlayment to help mitigate sound transfer and maintain a comfortable living environment,” says Romano.
Another key cost-saving strategy is leveraging scale. She notes that AvalonBay is able to achieve greater efficiency and cost control across its renovation programs by driving volume and establishing regional pricing agreements with contractors.
DeFilippis feels strongly that this strategy shouldn’t be overlooked.
“We streamline costs by locking in prices with both vendors and our contractors,” she explains. “Doing the renovations on repeat and staying disciplined gives us cost control, which translates into more yield.”
AvalonBay ranked as the sixth largest apartment owner in the United States as of Jan. 1, 2025, with 84,058 apartment units in its portfolio, according to the National Multifamily Housing Council.
Securing affordable, reliable labor is key to not only staying on schedule, but also to avoiding costly vacancy losses. Fortunately, this burden has eased as the pandemic has become a more distant memory.
“The one silver lining is that vendor demand has cooled relative to the peak,” points out Degner. “We’re finding more flexibility in contractor negotiations and more competition for project scopes, which creates some ability to push back on pricing and timelines.”
No matter how good the team is, it’s easy to overspend by over-improving, especially in today’s high-cost environment. That’s why discipline might currently be the most valuable asset of all.
“Avoiding overcapitalization is the largest obstacle in today’s market,” contends Dovner. “Renovations don’t always lead to higher rents, particularly in markets where affordability is stretched.”
This dilemma is compounded, he says, by a persistent supply-demand imbalance for Class B and C housing that has limited the amount an owner can push rents without also pushing the tenant base out the door. Kaufman is experiencing a similar tension between improvement and restraint that comes with “class” warfare.
“We’re cautious not to over-improve units in markets where the delta between Class B and Class A rents is narrow,” he says. “Instead, we aim for a ‘best-in-class B’ feel — clean, modern and functional, but not luxury priced.”
Whether it’s a “class” problem or not, Simon believes the current renovation dilemma boils down to one question: “Are you going to get paid for the work?” he asks.
“Let’s say you’re looking at a $15,000 renovation, but comps show that a renovated unit only rents for $2,100, versus $2,000 for an unrenovated one. That’s only a $100 difference. It’s hard to justify the investment with that kind of delta.”
Then you add in inflation. Simon notes a renovation that might have cost $10,000 per unit a few years ago may now cost $15,000 or even $20,000.
“So, you’ve got pressure from both sides — costs are up and rent premiums aren’t keeping pace,” he continues. “What the market’s really waiting for are two things: first, for inflation to ease so renovation costs come down. That’s starting to happen as the market slows and contractors become more available — basic supply and demand. Second, rent growth needs to return.”
Of course, there is also a third and even a fourth option: Don’t purchase any properties in need of a little TLC (tender loving care), or simply abstain from renovating.
“We have halted renovations due to market conditions,” declares Connolly.
However, she is quick to note the impressive performance of two previous full renovations that were executed during different economic and market conditions.
The renovations included the 320-unit Hunter’s Chase in Midlothian, Virginia, which averaged $15,000 per door and yielded an average monthly premium of $212 — an ROI of nearly 17 percent; and the 350-unit Trails at Short Pump in Richmond, Virginia, which averaged $18,000 per unit and produced a $175 monthly premium, resulting in an ROI of nearly 12 percent.
Sometimes, the best renovation strategy may be no renovation at all. That’s because holding off on these improvements can actually add value by leaving room for the next buyer to unlock upside.
“Where some owners get into trouble is doing a renovation that doesn’t drive additional income,” cautions Simon. “Then buyers come in and say, ‘What’s the point? You’ve already renovated. Where’s the upside?’ So, again, less is more.”
In this market, the smartest act on the tightrope might be knowing when to inch forward and when to not move at all.
— This article originally appeared in the June 2025 issue of Multifamily & Affordable Housing Business.