Leading Developers Pile on High-end Amenities to Attract Tenants

• One developer offering ‘over-the-top’ options
• Surveys determine interest
• Getting on the Internet bandwagon
• Calculate cost, then raise rent

Owners of large apartment communities are bulking up on amenities like never before with the goal of offering residents a package of services that is more appealing than single-family homeownership.
The challenge for owners of smaller apartment building is clear: how can you add comparable features without the large economies of scale that your competitors enjoy? But whether you have 100 units or 10,000, the goal is the same. “[You’re renting] an entire package of peace of mind and a complete package of services,” says Patrick R. Whelan, chief operating officer of Archstone Communities in Denver. “It’s not just an apartment box but, rather, an environment.”

To comprehend the extent to which amenities are driving the apartment market, consider the new Grand Venetian in Dallas. This 514-unit apartment complex developed by the Palladium Group has an impressive list of amenities. The swimming pool area, modeled after that of Las Vegas’ Mirage hotel, includes a sand beach and a food court where residents can charge meals and snacks to their apartments. The 3,200-square-foot fitness center has a cardiovascular room, a weight room, two tanning beds, a heated whirlpool and an on-staff personal trainer. The property also has an automated bank teller machine (ATM) and several outdoor sculptures by a noted Italian artist.

One developer offering ‘over-the-top’ options

Archstone is also adding over-the-top amenities to its luxury apartments. The company’s larger communities have resource centers that offer a full schedule of activities for adults and children. Other common areas feature full fitness centers with aerobics classes, business centers with computers and fax machines and entertainment facilities with big-screen television sets and surround-sound audio equipment.

The trend isn’t restricted to the luxury market. United Dominion in Richmond, Va., which owns 85,000 apartment units, is adding to its older buildings security alarms, gated access where possible, space-saver microwave ovens and upgraded lighting. Common-area amenities include fitness centers, aerobics rooms, business centers and children’s learning centers. A putting green and car wash have been tried as well.

It’s difficult for owners of smaller apartment buildings to replicate expensive common-area amenities because economies of scale are required to cover the costs. “A large-scale project like the Grand Venetian has a superior amenity package because [the costs] are amortizing over 514 apartments,” says Spencer Stuart, chief operating officer of the Palladium Group.

As John Schneider, president and chief operating officer of United Dominion, points out, “If I have 600 apartments and [someone else] has 60, I can afford to put in a much better community amenity package.”

The wiser strategy is for smaller communities to add value to individual apartment units. “Maybe [the smaller community] can put in the space-saver microwave and the monitored alarm, then go across the street to Gold’s Gym and try to cut a deal for the residents to use their facility,” Schneider suggests.

Innovation makes sense, too. For instance, United Dominion plans to introduce optional renter’s insurance. “Hurricane Floyd hit some 1,100 of our apartment units, and it was really tough for some folks. We are striking a deal with a major insurance company that will provide renter’s insurance to our residents,” Schneider says. “Our accounts receivable system will keep track of who has the insurance, separate the money and deliver it to the insurance company.”

Surveys determine interest

Regardless of the community’s size, amenities should be well matched to the community’s resident profile. For example, Stuart cites a 246-unit Palladium Group development that is expected to attract corporate executives who will live in the area for only a few years. The amenities package will include a swimming pool with lap lanes, an aerobics studio, a cigar lounge and a formal entertaining area with a sixth-floor view and a garden. The point isn’t that those features are the perfect package for every situation, but rather that they reflect the lifestyle of the anticipated residents, notes Stuart.

Collecting data about residents’ demographics, preferences and expectations helps guard against spending money to provide amenities no one wants.

Archstone uses a third-party research outfit to conduct two surveys annually and supplement the data with focus groups as needed. “All our decisions are based on a review of [our] customers and a determination of what adds value,” explains Archstone’s Whelan. “For example, our research told us noise was one of the biggest issues, so [we’re trying] to reduce sound transmission between apartment units, and we have begun to integrate that [objective] into the engineering specs for our new developments.”

United Dominion also conducts annually a formal resident satisfaction survey that includes questions about various amenities and services. Schneider says the survey is supplemented by off-the-cuff dialogue when management officials visit the company’s properties. Owners of smaller buildings can conduct informal surveys of their own and solicit feedback from individual residents, rather than hiring an independent consultant.

Industry group reports also provide good insight into the relative popularity of various amenities. In designing the Grand Venetian, the Palladium Group used outside research documenting that swimming pools and fitness centers are among the most sought-after amenities. That information, Stuart says, convinced the company to spend the most money possible on those two common areas.

Getting on the Internet bandwagon

One of the hottest new amenities is high-speed Internet access, which the Palladium Group, Archstone Communities and United Dominion all offer or plan to offer in the immediate future. The Grand Venetian is wired for broadband cable-modem service, which was introduced on a trial basis soon after it opened.

Archstone Communities is provisioning high-speed Internet access now with a view toward using the capabilities for building management in the future. “We want people to be able to post service requests, pay their rent and communicate with the management of the community [through the Internet]. That will be the platform for operating the world, going forward, and I would emphasize that [trend] for the small apartment owner,” says Whelan.

United Dominion plans to offer a 128k line (upstream and downstream), which will cost residents $25 to $30 a month to use, and a T1 line, which residents can access for $50 a month.

These services typically are installed and operated by a third-party provider. The upfront cost to the building owner is nil, and revenue sharing is common after the provider recoups its initial investment. The zero start-up cost means smaller operators can consider offering this amenity without making a major investment.

Calculate cost, then raise rent

The Palladium Group, Archstone Communities and United Dominion don’t charge separate fees to use common-areas or in-unit amenities – with a few exceptions. Nominal fees are collected for ATM withdrawals and tanning-bed sessions. Rent is charged for the exclusive use of formal reception or big screen television rooms. And service providers charge residents $25 to $75 a month for high-speed Internet access and an Internet service provider (ISP) account.

Despite the lack of separate fees, amenities aren’t added willy-nilly without regard for the bottom line. Schneider says decisions about amenities at United Dominion’s properties are made on a community-by-community basis, and any new services must pay for themselves through higher rents. “We expect to raise the rent to get a return that’s roughly double the return on the basic apartment,” he explains. “Let’s say you can make 10% on your investment in the apartment industry. We want to double that. And let’s say it costs $300 to [put in a space-saver microwave]. You want a five-year payback period. That’s $60 per year, so you would need to raise the rent $5 a month.”

On-site managers are responsible for deciding which amenities can support an increase in rents. “We have a list of amenities, and we add and subtract from it as need be, but it’s up to the individual profit centers [to decide] whether [a particular amenity] is appropriate,” Schneider says. “When our folks want to put in an amenity, they have to justify it on the rate of return. If they’re not willing to raise their rents to make that minimum return, that amenity doesn’t get done.” The same discipline can be applied regardless of the number of apartment units.

Another strategy for owners of smaller operations is to focus on service, rather than concrete amenities that require a lot of space and special equipment. “If you’re small, you can orient yourself around the basics of convenience to a customer. You’re there when they need you,” says Whelan. “[Owners] in general do not focus on service enough. You don’t have to be big to provide clean environments and clean apartments.”