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Can We Upgrade Rental Grade?

by Nic Darling on February 10, 2011 · 10 comments

in Development,Philosophy,rental

Most of us have probably heard the term “rental grade” in reference to the finishes in an apartment or rental house. Finishes referred to in this way are usually chosen largely for low cost and/or high durability. Things like occupant health or design aesthetic tend to be secondary at best in a “rental grade” unit. This marginalization of the more complex needs of the occupant (beyond simple shelter) is usually carried over into the actual structure of the house as well. Many rental units feature low insulation, sub-par windows, cheap mechanical systems and little to no attention to air sealing. They are inefficient which means they are expensive to the occupant and costly to the environment.

Over 30% of our homes in the US are occupied by renters. This number is likely even higher in major cities. Some of these renters have plenty of choice in the market (from high rise condos that haven’t sold to converted warehouse lofts), but even these privileged renters have very limited options when it comes to performance. For the majority of  less well-funded renters the options are even slimmer. Sure, there are still cool warehouse conversions and old row homes, but if you are hoping for something healthy and efficient, you are likely out of luck. It is also tough to find modern architectural design in anything but the most expensive buildings.

Of course, there is a reason for this, particularly in Philadelphia where we have one of the worst build cost to rental rate ratios in the country. Rental grade is inexpensive. It is cheaper and easier to build drafty, under-insulated units. Material costs are lower if one is unconcerned about air quality. The margins are tight in the Philadelphia rental market, and often, to give people the space they want at a price they can afford, one has to cut corners.

This is a contest where one wants to avoid the top five.

So, how do we upgrade rental grade? How do we improve performance, design and health without pricing everyone out of the units?

To be honest, I’m not sure it’s possible. At least, I think it might be unrealistic to imagine that every rental can perform to the kinds of standards we expect from our homes. Rental grade finishes, in all their unpleasant glory, will remain a consistent part of the landscape. I certainly think there can be improvements in all rentals, but to expect radical change across the entire market is a bit niave. So, the question is, where can we effect change and what kind of change can it be?

I think that there is a market niche in rental much like the one we have identified in homeownership. This is a group of people with a price point somewhere in between the bottom of the rental market where mere location is the driving factor of choice and the top end where money presents broad opportunity. Much like in housing, I think there is an opening to provide a better product at a similar price, but it requires compromise from both the renter and the owner.

The owner needs to be willing to spend the time, energy and money (though hopefully not too much more) up front to create a better building. The design process has to be thoughtful and involved so that performance can improve without ballooning the budget and finish can become more “high end” without high-end products. This upfront investment may mean a slightly less intense focus on pure profit with an eye for the long term benefits of the building strategy on the bottom line. Energy rate increases, growing consumer education and potential incentive structures will add long term value to a building with potentially lower opening margins.

The renter needs to understand that a better designed space can be smaller and still comfortable. They need to embrace urban living so that the city becomes an extension of their home. There may be a slight premium to the spaces but if they can grasp the energy savings and learn to use the building to their advantage that premium evaporates in the face of other savings. There shouldn’t be a sacrifice involved in a well design building. Quite the opposite in fact. But there needs to be a change in perception, especially when it comes to unit size.

Naturally, there will be a finish value difference to be understood as well. This is where design comes in. The expectation of things like granite countertops and other supposedly high-end specifications needs to be challenged by design that redefines affordable materials and creates a new understanding of value. Healthy finish options, artfully assembled can create a better space than all of the sexiest interior design in the most expensive downtown loft. I truly believe that good design can work it’s way around cost.

Lastly, the renter needs some flexibility when it comes to location. This is, however, not a one way street. While the renter should be prepared to find themselves slightly on the edge of their search area, owners need to provide locations that are well connected via transit and in neighborhoods growing in vibrancy and amenities. Location is the key consideration of many renters and owners need to help those renters understand new areas of the city that are not only viable alternatives but in many ways better ones.

This is, as usual, just a rambling account of my own opinions. It is light on details, but that is something we will remedy soon as we begin to develop our own rental units. In fact, we have already sent a couple investor proposals to that end, and if you are interested in getting involved, you need only let us know. We will be talking quite a bit about our specific strategies as those projects get under way.

As always, this post is intended as more of a conversation starter, albiet a long one. So, what do you think? What is the niche market where energy efficient rentals are possible? How much do health, efficiency and design matter to renters? Even if renters aren’t necessarily willing or able to pay much more for a rental are they willing to rethink space requirements, finishes and location in exchange for these things?

Let’s knock this about in the comments.

If you enjoyed reading this post I can promise you'll love our new writing over at Postgreen Homes. Yeah, we know that's the same thing your favorite band said and their new album is nowhere near as good as their early stuff, but seriously, we are actually still getting better.

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1 lavardera February 10, 2011 at 2:52 pm

An article on Renting vs Buying reinforces the notion that the margins are tight in Philadelphia:

But I say you created your own market with your new houses and defied the market indicators. I think you can do it again.

2 jeremy February 11, 2011 at 1:57 pm

couldn’t agree more and very well said!

we are doing our best at making this happen already with our current project, ECO Modern Flats. There are certain characteristics of the project that made this financially feasible where it would not always be. However, the investment in healthy and sustainable design and finishes looks to be paying off. Leasing is going extremely well and we are just getting started…

3 mc February 11, 2011 at 3:22 pm

i think what you referenced in this post mainly applies to new construction or major re-hab rentals. in many cases, as i think is the situation in philly, landlords/developers have the “what are we dealing with here” mentality in that they renovate or address what needs to be fixed or upgraded to get to whatever rental rate they need to get to financially or that they can obtain in that market or neighborhood. if they could get more extreme rents – $2,000 for a one bedroom on e. passyunk, then they would surely make that one bedroom very attractive (efiicient, updated, etc). there’s no incentive to do this now and it’s not highly competitive to have efficient, well designed rentals under a certain price.

4 Ian Watson February 13, 2011 at 12:38 pm

The rental debate I always toss around in my head is who should pay for utilities. If the goal is to reduce energy usage, should the renter be paying, or should utilities be included in the rent? If the renter is paying there is very little incentive (beyond the few benevolent owners out there) on the owner’s part to invest in good insulation and windows. On the other hand, if utilities are included in the rent there’s often the mentality from renters that, “I’m paying the same for utilities no matter what I do so I’m going to crank the heat and take 2 hour showers to get my money’s worth.” Is there a way to solve this conundrum? I’d be interested in hearing thoughts from the readers of this board.

5 Kevin February 13, 2011 at 1:12 pm

This is a significant issue in SF as well. Thankfully, SPUR has taken this on as an initiative ( and to push for more work on this, particularly with regard to knowledge / education on the part of building owners, many (most?) of whom are small (# of units) owners.

6 Greenbuildingindenver February 13, 2011 at 11:57 pm

Energy efficiency is a good market differentiator, but it won’t earn you increased rent until the tenants have lived there for a full year and are convinced of their savings. But then word of mouth (aided by the internet) will definitely be on your side because even renters love to brag about low utility bills.

Durability is the most important feature of the finishes in a rental. Increased durability can be achieved without a huge upcharge and results in a more desirable unit than rental grade. The mass-market purveyors of “conventional wisdom” rental grade just haven’t given it enough thought. If that sounds familiar, it’s because Chad has already applied the same thinking to energy efficiency:

7 Mark February 14, 2011 at 2:56 pm

how about some kind of design that allows the renter to own (and bring along) their own fixtures. This is already done in Europe I’m told, people bring their own lighting fixtures, etc, and wire them in. BUt how about if we had a better “plug and play” standard that would be as easy as plugging a cord into a wall outlet? Why not just have bathrooms with some ANSII standard infrastructure in an empty room? Bring your own tub, sink unit, etc. (these would of course need to be designed to be portable). Or maybe the tub just has an ANSII fitting on it that lets you plug your own faucet into it easily….

Isn’t it time for housing to catch up with the rest of our manufacturing base/technology?

8 chris February 18, 2011 at 1:41 pm

I agree with some of the posts about why should landlords pay for efficiency if the tenants will be benefiting…but isn’t the landlord’s ultimate goal is to keep each owned unit occupied with good tenants? Tenants who see landlords going the extra step to improve their quality of life are sure to be better, long term tenants.

9 Scott Sanders February 21, 2011 at 3:27 pm

I completely agree that there is/can be a niche market for better than rental grade rentals. Since this is America, it seems to me that the key would be putting a price not only on the dollar savings from utilities, but also somehow on the performance, design, health, and location benefits.

In typing that, I realized that location premiums are probably already figured into the average local rental rate, so the differentiation really must come in the livability and performance aspects of the rental. Is it healthier to live in (from less doctor co-pays to living longer and with less stress) and better designed (from a great functional layout to more enjoyable gatherings with friends and family)? Does it cost less to heat and cool than the neighbor’s house? What sort of “upgrades” can you put into it (rain barrels, garden beds, chicken coops) and what premium can you charge for those upgrades?

I believe that the real underlying problem here is the valuation of the intangible benefits of living in a specific house with specialty sustainable features. Consumer education by in house sales people on features and benefits is frequently practiced in for-sale production home building (albeit for square footage and granite counters), but seems less frequently practiced in showing rental properties because most real estate agents don’t care about a specific property and/or the owner isn’t really involved in the showings.

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