How to Predict Your Rooftop Amenity ROI Before You Break Ground

How to Predict Your Rooftop Amenity ROI Before You Break Ground

We begin about a dozen rooftop amenity projects each year. At each kickoff meeting with our clients, we ask specific questions about their vision, what is most important to them and their project, and what metrics they have for the success of the project. We refer to this step of the process as the Mind Meld, where we set a strong foundation and get an appropriate alignment on values for the project and our strategic relationship moving forward.

With this purpose in place, we then take a Deep Dive into assessing the potential value of the amenity spaces and a target budget range for the associated investment. We then apply the client vision, investment range, and potential value to the project scope to identify a program and theme. 

Over the past 8 years, we’ve collected unique data within our rooftop amenity niche, including the impact of rooftop amenities on revenue, the potential market value of rooftop amenities, actual construction costs, and cost per square footage. We have then been actively transforming this data into valuable insights that help us create more successful rooftop amenity designs for future clients.

Because of this process, we simply know more about rooftop amenities and their value than we ever could have otherwise. And we firmly believe in the value of starting each project with the bigger goal in mind. At the end of the day, it doesn’t matter how inspiring and creative the design we produce may be. Our clients need to know there will be a tangible return on investment. What’s more, it should help them and their projects reach their highest potential.

Determine Your Metrics for Success

Each project is inherently different, and so each merits a unique design solution. But it’s not easy. Economic forces of the past have entrenched the multifamily industry in a state of homogeneity. However, contemporary market pressures are now requiring uniqueness. This presents both a challenge and an opportunity for rooftop developers.

As we’ve met with clients and discussed their metrics for project success, we’ve identified a few patterns. All multifamily developers are interested in quick lease-up, lower-than-expected vacancy, and a sales process made easy through amazing amenities. But, what makes a project stand out are the success metrics that are unique to their specific project. 

Consider your narrative for the project. What is going to sell your vision to future tenants, investors, and community stakeholders? What do you need the rooftop amenities to contribute to that story? 

As you contemplate your metrics for success for your rooftop amenity design, ask yourself the following questions.

  1. How will rooftop amenities help my property communicate the value it provides to future tenants? 
  2. How do rooftop amenities help me demonstrate the promise of returns to investors?
  3. How do rooftop amenities help illustrate the positive public impact of the project to community stakeholders?

You may discover that the success of the rooftop amenities extends further than you first thought, having an outsized influence on how your project is received by the marketplace, lenders, and community members. The importance of financial benefit to your bottom line is often eclipsed by the desire to create something you can be proud of. In the world of real estate development, it’s not just about the economics; relationships and reputation also lead to future successes.

Rooftop amenities have the potential to yield multiple beneficial results that will differentiate your project and help you stand out as a successful real estate developer.

Do Rooftop Amenities Actually Add Value to Multifamily Developments?

The biggest challenges real estate developers face when getting started with rooftop amenities are arriving at the right design solution and knowing if their investment will eventually pay off.

The return on investment for rooftop amenities is high for most multifamily developments — regardless of asset class. That’s because these amenities improve your net operating income, growing your cash flow and ultimately increasing your property value. While rooftop amenities are expensive to design and construct, the value they generate is still consistently much greater than their initial cost.

The primary economic advantage of rooftop amenities is their contribution to monthly cash flow from increased rents. Additionally, they help increase retention and boost occupancy rates. But to stay conservative, we recommend focusing solely on rents when predicting ROI. The other benefits we’ll consider a bonus.

How to Calculate the ROI of Rooftop Amenities

To understand how much you should invest in your rooftop amenities, you’ll need to consider your asset class and total your proposed rooftop amenity square footage. Use the calculator below to get an indication of your total hard and soft construction costs. These should be on their own line item on your pro forma.

Next, you will determine your annual revenue that is generated by the amenities. Rooftop amenities can increase rents by 10 to 20 cents per square foot. This is where the details of your market and comparables come into play. If few of your comparables offer rooftop amenities, you can justify increasing your rents by around $0.15/sq. ft. If all of your comparables offer rooftop amenities, you’ve just discovered the cost to remain competitive in your market. 

With a clear picture of necessary construction costs and an appropriate adjustment to rents, you’ll see the impact your rooftop amenities will have on returns. But because each multifamily development deal structure is different, isolating the ROI of rooftop amenities from the remainder of the project doesn’t always make sense. 

Although the value generated by the amenities will far exceed the initial construction costs, that value would not exist without the rest of the project. After all, it’s the apartments that created the demand for rooftop amenities in the first place. It’s better instead to include both the cost and revenue associated with rooftop amenities in your pro forma with the rest of your revenue and expenses.

Rooftop Amenities and Your Bottom Line

Multifamily real estate development requires a solid investment strategy. Rooftop amenities are quickly becoming a major part of the equation. They positively impact your revenue — the variable over which you have the most control. 

Before rooftop amenities can increase your bottom line, it’s important to understand their specific costs and benefits. Then you can make informed decisions on how to make the most of your investment.

Market pressures are driving future developments to be more unique and creative. How you implement rooftop amenities on your upcoming projects will help determine your future success as a real estate developer.

At Loft Six Four, we help multifamily real estate developers create immersive rooftop amenities and outdoor living experiences that have a tangible ROI. Our expertise takes shape through The Immersive Experience Method, our proven process for your success. 

Interested in making rooftop amenities a key part of your next development project? Let’s talk.