There’s no doubt outdoor amenities add value to a development project. It can be difficult, however, to quantify just how much value they add.
Despite the challenges involved in getting your amenity valuation right, there are ways to estimate the impact your outdoor amenities will have on your bottom line. Outdoor amenities are effective at increasing occupancy and driving rent. When designed correctly, they increase property value in a measurable way.
How Amenities Increase Rental Income and Occupancy
According to data collected by the National Apartment Association, community-wide amenities garner higher average rent increases compared to unit-specific upgrades. Tenants are willing to pay more for access to community amenities, particularly those that are pet-friendly and provide health and fitness opportunities. Swimming pools, outdoor kitchens, and common areas for socializing are also high revenue influencers. Based on CoStar data, roof terraces have the highest estimated effect on boosting rent, as illustrated in the chart below.
Additionally, amenities are huge marketing opportunities that draw tenants to a property. Beautiful photos, a well-executed virtual tour or sales walk, and great resident reviews all work together to market the desirable lifestyle your property is offering. Amenities are key to remaining competitive in the marketplace.
How Amenities Increase Value
By driving up occupancy and rent, amenities increase your property’s profitability. When using the Cap Rate Method to calculate value, an increase in Net Operating Income (NOI) means higher property value. Consider the following example:
NOI / Cap Rate = Property Value
3,000,000 / 0.05 = 60,000,000
A 3 million dollar NOI divided by a 5 percent Cap Rate equals a 60 million dollar property value. Now, by increasing the NOI by $300,000 look what happens:
3,300,000 / 0.05 = 66,000,000
Thus, by contributing to an increased NOI, amenities can bolster property value by the millions.
Calculating Amenity Impact
The data science team at RealPage, a leading provider of real estate data analytics, has spent considerable time mining lease and amenity data from multifamily properties across the country. Based on their analysis, 5 to 9 percent of your total rent can generally be attributed to amenities.
In other words, 5 to 9 percent of your revenue is likely to be impacted by how well your amenity lineup is working. While you would need in-depth research to isolate an amenity type and determine its value, you can quickly apply their general findings to your project and estimate the impact amenities have on your property’s value.
Using the same example from above, multiply the NOI by 5 percent to find the share impacted by amenities.
3,300,000 x 0.05 = 165,000
Then, subtract that number from the NOI, and divide that by the cap rate to illustrate the diminished property value if the amenities aren’t working.
3,300,000 – 165,000 / 0.05 = 62,700,000
Then subtract the diminished property value from the projected property value and you have a number expressing the impact of amenities on your overall property value.
66,000,000 – 62,700,000 = 3,300,000
Amenity Impact = $3.3 million
With a set value of dollars at stake, it’s easy to see why it’s critical to get these spaces right. If you got the amenities wrong on this project, you’d miss out on millions of dollars in value.
Compared to the relatively small construction cost of these key spaces, it’s worth the investment. If you spent half a million dollars on the amenities in the example above, that is a huge return.
Next time the value of your amenities comes into question, run your project through this simple calculation. Then you can move the conversation from discussing if your amenities add value to how to create amenities that can actually achieve your goals.
Have a project in mind? Let’s talk about how we can help you create immersive rooftop amenities that stand out and make you money.