Commercial Real Estate Appraisal - Interview with Steven Read
I spoke with Steven Read from Burgess Cawley Sullivan & Associates, a commercial real estate appraisal and property tax consulting group based in Vancouver, British Columbia. Steven specializes in appraising commercial and multi-unit residential properties in the Vancouver market.
Appraisers fulfill several functions, the first being aiding purchasers determine the current and potential value of a building, but that expertise can also be used by current owners to prioritize improvements in a building to help them generate the highest income from that property. That’s were Steven comes in.
Steven has appraised more that 120 buildings in the West End alone. He has appraised buildings to set benchmarks for property tax reviews, to determine value in the case of deaths and divorce, and in the divestment of corporate portfolios. He also contracts with building owners that want to maximize their investment through increasing the value of their apartments, and ultimately their rental income.
Bill Goold: What is your general advice for an apartment owner that wants to maximize the value of his or her investment by getting the best rents.
Steven Read: Tenants gravitate to buildings that look nice. They look for things that would make them want to live there; they want the building to be clean, attractive, and well maintained. The first place that sets their expectations is the front lobby and the landscaping.
BG: And how should that look?
SR: Again, clean and well maintained. Landscaping doesn’t have to be fancy or high maintenance, as long as it trimmed and weeded. For the lobby, clean and well lit are the things that first strike a potential renter when they come to look at the suite.
BG: What about the parking area. Can you charge more money for underground parking?
SR: Not really, Bill. It’s more the case that underground parking is on someone’s mental checklist. If someone is looking for an apartment with underground parking, they won’t look at apartments that don’t have it. If they don’t care what sort of parking is available then they won’t pay extra for it. One thing to remember is that the parking lobby is more important in the long term for guest satisfaction.
BG: Parking lobby?
SR: With underground parking, the tenants will usually see the area that surrounds the parking elevator more than they’ll see the front door. Many upscale buildings recognize that fact and make the parking lobby as attractive as the regular lobby.
BG: Are there any other parking upgrades that can pay off for an owner?
SR: Just making sure the garage is clean and bright, with recent paint and upgraded lights. That’s especially important in areas where there is a large single female workforce.
BG: I’d never really thought of that. That’s a great tip. Now what about the common areas?
SR: Well, the common areas are an extension of the lobby, and should be thought of as being one continuous area. It wouldn’t make much sense to upgrade a lobby to a thoroughly modern design with stylish lighting, only to have the tenant turn the corner and go back 50 years. It’s important to plan any lobby renovation with the rest of the common areas in mind.
BG: That brings us back to cost. Are these upgrades going to pay for themselves in increased rents?
SR: I think a better way to look at it is that all of your fixtures, carpet, paint and trim have a lifespan, and since you have to replace fixtures as they wear out, it’s often best to replace ancillary fixtures at the same time. For example, if you wanted to update your lighting to halogen pot lights with stainless trim, it might be a great time to replace your old beat up mail boxes with a new stainless one at the same time.
BG: I had an owner ask me about carpet in the common areas. What’s your advice for the style of carpet to put into common areas?
SR: I find that mid-toned carpets with large patterns work the best at hiding wear and stains. The only thing to remember is that as your carpet color darkens, you’ve got to compensate with lighter colored wall paint so as to balance out the visuals. That’s especially imporant for seniors whose eyes don’t work so well in dim light.
BG: Now what about the less glamourous common areas; the laundry room and storage lockers?
SR: Tenants actually spend a fair amount of time in the laundry room, so it’s best if you upgrade the lighting and have a good regimen to keep it clean. With locker rooms, it just needs to be clean. Tenants aren’t expecting anything more than a modicum of security, and a minimum of dust. They probably won’t go to the storage locker more that once or twice a year anyways.
BG: That’s all the common areas. What about the suites: what kind of upgrades do you see as being important for maximizing rental incomes?
SR: That’s a huge topic. Let me break it down into the three main areas of an apartment, the entry, the kitchen and bathrooms, and the living and sleeping area.
In the living and sleeping area there are a couple simple things to do to spruce things up. If the suite is carpeted, steam cleaning the carpet is a good first step. You can further enhance the carpet by getting it restretched. That can add years to a carpet if it was of sufficient quality to begin with.
If the carpet has reached the end of it’s lifespan, then I would suggest replacing it with carpet, or a good quality laminate flooring or hardwood.
BG: Which works out the best over the long term? I mean from a maintenance point of view.
SR: That’s a tough one to answer Bill, as it always comes down to the quality of the materials used. I’ve seen laminate floors that lasted three years, and I’ve seen them last ten or more years. But if you’re asking me which I’d pick? I’d go for hardwood. I think tenants appreciate them, and they can be refinished and re-sanded a few times and they’ll still look as good as brand new.
If the suite comes with window coverings I find drapes to be the best value. Unlike verticals or venetians, they are just about maintenance free, and they provide the best light and sound attenuation, and the best insulation effects of the three.
BG: Now would you continue the flooring right to the door of the suite?
SR: That really depends on the configuration. Many suites have the bathroom and kitchen close to the entry door. If that’s the case, I like to see common flooring in all three, usually a neutral colored tile. It’s also the most hardwearing configuration.
BG: I guess the kitchen is the showroom of the suite. Are people’s expectations going up.
SR: Oh, absolutely. Today’s apartment owner is competing against some very high end condominium product out there, and it’s difficult to know where to draw the line when doing a renovation. At the very least, you need to make sure that your appliances are white, matching and in good working order.
Another inexpensive upgrade is the countertops. For $10 or $15 dollars a running foot, you can replace the countertops. Compare that to $100 to $150 a running foot for granite, and you can see why laminate countertops are making a comeback. People are impressed with granite, but laminate comes in some great finishes, and from the owners point of view, it’s a good investment.
As for the cupboards, it’s important to make sure they are in good shape. If you want to upgrade them, you can do as little as new hardware and a paint job, to the relatively inexpensive refacing, to a complete replacement. Just remember the goal here is to make money!
In the kitchen, it’s often better to spend some money on new lighting. That will help any space seem cleaner and brighter.
BG: Now some owners I know ran into some problems when they wanted to add a dishwasher.
SR: Yes, in older buildings that can be a real issue. Is there enough power? Is the plumbing stack large enough to accommodate the extra flow? How many lower cabinets are you going to have to replace. It can be a real headache. And realistically, a dishwasher will only get you about another $25 per month. I know what you’re saying though, many landlords run into tenants with a mental checklist, and sometimes a dishwasher is on that list.
BG: Balancing costs is always an issue with owners. Most owners I know pride themselves on being frugal.
SR: Well, that’s just good business.
BG: Can we talk about bathrooms now?
SR: That was next on my list.
BG: So what are the features in a bathroom that tenants are attracted to? What makes them want to spend more for rent?
SR: That’s really tough to say. I do know that from a straight payback perspective, one of the best values is replacing toilets. The savings realized in water consumption are about five years, less if you can find dual-flush toilets at a competitive price. Toilets represent about 25% of your water usage in a building, so cutting the amount of water they use in half is a real savings for the owner. Low flow shower heads are also great.
Another inexpensive upgrade that your tenants will appreciate if you point it out to them is to make sure the electrical outlet in the bathroom is a “ground fault interrupted” or GFI type. Absolutely essential in my view.
BG: I guess that’s the other side of the equation. Tenants may not pay more for some things, but if they save the owner money, that amounts to the same thing.
SR: One thing I have seen in some buildings is the creation of new usable space. I’ve seen a couple of buildings where two closets backed onto one another. The owner knocked out the wall between them, added a phone jack, internet, and electrical, and created a mini office. That was a great selling feature, and one that added a nice feature to the buildings. Another great re-purposing is taking a large one bedroom and converting it into two small bedrooms. Just by changing that configuration, the owners saw a good increase in rents achieved.
BG: Thank you Steven. I really appreciate your perspective on these things. I can see that your experience as an appraiser really makes you the perfect person to talk to about increasing the value of a building.