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Rental Remodeling Spending: Often-Overlooked Billions
People require more care and maintenance as they age…and so do rental properties. As rental stock ages, rental remodeling, repair and maintenance, and systems replacements make up an increasing part of the overhead line item. Such rental-related costs also represent a significant component of the nation’s growing remodeling expenditures — as much as $56 billion in recent years.
It’s relatively easy to find references that portray remodeling as a significant part of the construction industry, and therefore of the national economy. A typical report on the subject is likely to point out how many baby boomers own their own homes, discuss how much wealth they have, and draw implications for the strength of the remodeling industry in the future.1 But remodeling that takes place in rental properties often is neglected or underplayed in this type of analysis.
Yet rental remodeling should be a topic of considerable interest. Of the 33.6 million housing units in the U.S. that are occupied by renters, half were built before 1968, and nearly 10 million were built before 1950.2 The older structures require significant maintenance and repair if they are to continue providing adequate housing services. Moreover, given that a quarter to a third of a million rental housing units are produced in a given year,3 the average quality of the rental housing stock can only be upgraded slowly by building new units and retiring older ones. So when the rental stock needs to adjust to changing consumer preferences or the introduction within a reasonable time span, property alterations are required. [This article refers to remodeling activity in all rental property, including single family. According to the Census Bureau’s 2004 American Community Survey, about 11 million (30 percent) of the 36 million renter-occupied housing units in the United States are single family.]
Rental Renovation: Total Dollars Spent
If additions, alterations, maintenance, and repairs are added together, spending on rental properties totaled $55.1 billion in 2004, the most recent year for which detailed information is available. To put the total amount of rental remodeling expenditures in perspective, the total value of new multifamily construction put in place in 2004 was $38.5 billion. Growth in rental remodeling expenditures was strong and relatively consistent from 1998 through 2003, when it reached a peak of nearly $56 billion (Figure 1).
Source: Survey of Residential Alterations and Repairs, U.S. Census Bureau
In addition to showing that rental remodeling backed off slightly in 2004, the graph suggests that a shift in the composition of the expenditures occurred. This, however, is due to a change in the way the Census Bureau conducts its Quarterly Survey of Residential Alterations and Repairs (SORAR). The survey no longer tabulates major replacements as a separate category. Items that would have been in that category are now captured in “alterations to housing units.” Prior to 2004, major replacements were treated as a subset of maintenance and repairs.
The greatest amount spent on a particular type of alteration to rental structures in 2004 was $3.4 billion for roofing. Kitchen and bath remodeling came in second at a little over $2 billion (Figure 2).
Source: Survey of Residential Alterations and Repairs, U.S. Census Bureau
Maintenance and repair of rental properties tends to be spread thinly over a relatively large number of different types of jobs, with only five of them showing aggregate expenditures of more than $1 billion in 2004 (Figure 3).
Source: Survey of Residential Alterations and Repairs, U.S. Census Bureau
Painting and papering is far and away the leader at more than $6.5 billion. Some property owners may repaint the interiors of their housing units more or less automatically when occupants turn over. This would not generally be true for other types of maintenance and repairs.
What About Spending Per Unit?
The SORAR provides useful information on aggregate spending, but doesn’t provide information at the level of individual properties.4 There are many reasons why we would like property-level information on rental remodeling. One is that the residential rental market is conceptually divided into a “professionally managed” share and “mom and pop” operations, and it is often presumed that these two components of the market respond to economic forces and generally behave in different ways.
For property level information, we have to go to a somewhat older federal source, the 2001 Residential Finance Survey (RFS). This involves contacting a sample of property owners identified in the decennial Census and collects additional information from them the following year. Although data on mortgages is the survey’s primary goal, the RFS collects some general property data as well. This provided a significant opportunity, especially because so few government surveys collect data from the owners of rental properties. In fact, NAHB participated in the working group that the developed the RFS questionnaires, and among the additions NAHB recommended for the rental property questionnaire were questions on remodeling expenditures.
Figure 4 shows average spending per housing unit on maintenance over a one-year period and on property improvements over a three-year period. There is no perfect dividing line between the mom and pop operations and the professionally managed buildings, but property owners who don’t employ a manger are likely to fall into the first category.
Source: 2001 Residential Finance Survey, U.S. Census Bureau and the Department of Housing and Urban Development
The figure shows that properties on average spend more per unit on maintenance and repairs if they employ a manager, but somewhat less on capital improvements (including upgrades to mechanical systems, remodeling kitchen or bathroom facilities, universal access improvements, and other improvements that add to the value of the property).
If spending is adjusted for the value of the property, the pattern changes hardly at all. Properties with manages spend more per dollar of value on maintenance and less on improvements. Expressed as a fraction of annual rent receipts, however, the difference in spending on maintenance and repairs almost disappears. Average spending is about 16% of the rent collected, whether or not a manager is employed (Figure 5).
Source: 2001 Residential Finance Survey, U.S. Census Bureau and the Department of Housing and Urban Development
There are several ways to interpret these tendencies. One is that professional managers monitor their properties better and spend more on routine maintenance that eventually enables them to defer replacement of systems some of which would be counted as capital improvements, and that the better maintained units are able to command somewhat higher rents in the marketplace.
The information in the RFS enables us to look at several other factors that may influence how much rental properties tend to spend on maintenance and improvements. Per dollar of property value, newer properties tend to spend less on maintenance and repairs, but roughly the same on capital improvements (Figure 6).
Source: 2001 Residential Finance Survey, U.S. Census Bureau and the Department of Housing and Urban Development
Of course, housing units in newer properties tend to have higher values, and this could be a factor. The inverse relationship between the value of housing units and the amount spent on maintenance and repairs and capital improvements is quite strong (Figure 7).
Source: 2001 Residential Finance Survey, U.S. Census Bureau and the Department of Housing and Urban Development
The RFS also collects fairly detailed information about different types of property subsidies. Unfortunately, many of these are relatively uncommon and so relatively few cases are captured in a survey the size of the RFS (about 70,000 properties, including rental, vacant, and owner-occupied). RFS rental properties reporting that they “benefit from a subsidy from a non-profit corporation,” for example, also report very little spending on maintenance and repairs (the median is zero). However, this is based on only a little over 100 data points.
The most common rental property subsidies reported in the RFS are low-interest rate loans and tax credits. Per dollar of rent receipts, rental properties spend the same on capital improvements whether or not they have one of these subsidies. However, the subsidized properties spend more per dollar of rent on maintenance and repairs. This tendency is stronger for tax credits than for low-interest loans (Figure 8). In general, tax credits are stronger subsidy than low-interest loans, and allow properties to charge lower rents.
Source: 2001 Residential Finance Survey, U.S. Census Bureau and the Department of Housing and Urban Development
Readers interested in the data sources can find them on the Census Bureau’s web site. The SORAR-based information on aggregate remodeling expenditures in rental properties is available at http://www.census.gov/const/C50/table_s1_r.pdf. The site for the RFS is http://www.census.gov/hhes/www/rfs/rfs.html.
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1 A good example is the introduction to The Changing Structure of the Home Remodeling Industry by the Harvard Joint Center for Housing Studies: http://www.jchs.harvard.edu/publications/remodeling/remodeling2005.html
2 According to the 2003 American Housing Survey, U.S. Census Bureau and the Department of Housing and Urban Development.
3 In 2005, for example, 203,000 of the multifamily units started and 32,000 of the single family units started were intended for rent. The multifamily number was lower than usual, as the condo share of new construction increased substantially.
4 On April 19, in an official letter submitted in response to a notice published in the Federal Register on February 21, NAHB specifically requested that the Census Bureau provide property-level information in a public use microdata set produced from the SORAR.
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