WASHINGTON, DC–It is clear that apartments — and offices for that matter — are increasingly being defined by the type of amenities they offer. Developers know this and have been incorporating such features as pools, fitness centers, rooftop lounges and firepits — even pet spas — into their designs. Service amenities are also part of the mix, such as packaging handling and valet. Such efforts have paid off: in general we can say that the more amenities that are part of an apartment building, the higher the rent that building can command and the faster the place will lease.

Now, in a new study, Newmark Knight Frank has quantified these amenities so a developer can reverse engineer how much it can budget for amenities given their expectations for rent and absorption pace. For the most part — with one notable exception — NKF's findings are intuitive. They include:

There is no silver bullet amenity that guarantees successful lease up or above market rents.
More amenities equal stronger performance.
More amenities plus stronger design equal even greater performance.
Social amenities come with diminishing returns to sales price.

Specifically, NKF found that among the 26 projects that traded within the past five years, those with more service amenities traded at a higher price point per unit than projects with fewer. However projects with more social amenities — the pools, the fire pits — traded at a lower price point per unit than projects with fewer. NKF concludes that:

Potential buyers are concerned about the maintenance costs that come with some social amenities …and those amenities can therefore yield diminishing returns for developers.

Nationwide Applicability

This study was based on projects in the Washington DC area but author Greg Leisch, senior managing director of Market Research, says the findings have nationwide applicability. Specifically, “the research applies to high-cost, sophisticated markets,” he tells GlobeSt.com, including the gateway markets of Boston, New York, Washington DC, San Francisco, Seattle and Los Angeles. Then less so to less sophisticated, less costly markets, he adds.

Merchant Builders

It is also important to note that apartment buildings with social amenities are less likely to pay off for what Leisch calls merchant builders or developers that don't hold a property very long, which is admittedly a small part of the market. Social amenities “tend to cost more money to build, take up a larger FAR footprint and increase operating expenses,” Leisch says. “All of that reduces the net operating income of the property and therefore reduces what an investor is willing to pay for the property.”

Specifically, buildings that offer 5 to 7 social amenities sold for $31,867 less than buildings offering 0 to 4 social amenities. Or put another way, there is a 7.6% premium for having fewer social amenities.

Even NKF admits this finding seemingly defies logic: another report conclusion was that projects with more total amenities traded at a materially higher price per unit than those with fewer total amenities. Buildings featuring 0 to 7 total amenities sold for $21,587 less per unit than buildings offering residents 8 to 13 total amenities.

The Importance of Design

The design of the apartment building is equally as important if not more so than amenities in enhancing rents and lease output, Leisch says. Of the 135 projects studied in the Washington DC area, NKF concluded that only 41 were well designed (NKF came to this conclusion in consultation with Phyllis Hartman of the Hartman Design Group). Those projects materially outperformed the projects that were not well designed, Leisch says. According to the report, well-designed projects have a lease-up pace of 19.1 units per month versus the average lease-up pace of 12.7 units per month for projects that are not well designed.

Well-designed, of course, is subjective which is why NKF turned to the Hartman Design Group. Leisch said Hartman evaluated projects based on two criteria — whether an apartment was attractive and whether it was transformative or had good buzz.

“Or to put in human terms, is the building good looking and does it have a good personality,” Leisch says.

Instant Insights /

When The Benefits Don't Outweigh The Costs Of Apartment Amenities

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