I just read a thought-provoking article over at The Brooklyn Reader reporting that across Brooklyn property managers are chopping up existing apartments to add additional bedrooms. The basic logic of this makes sense–the more renters an apartment can support, the more potential income to be spent on increasing rents. However, the apartment will also become more cramped and less valuable on a “per renter” basis.
Naturally, I wanted to take a more data-driven look at this. I decided to use Bed Stuy as a case study, since it was one of the neighborhoods mentioned in The Brooklyn Reader’s article. Here are some median rent statistics for Bed Stuy in the last 60 days taken from our Competitive Intelligence product (click to enlarge):
The spread in rent between one and two bedroom apartments in Bed Stuy is currently at $305 dollars. So, it seems at first glance that if you can inexpensively add a bedroom to an existing one bedroom, you should definitely do so. But, number of bedrooms is not the entire story in terms of apartment value. One bedroom apartments are more attractive to renters, at least in terms of what the market signals in terms of rent per square foot: $2.12 for one bedrooms vs. $2.00 for two bedrooms. So, you can expect to lose around 5.6% in per square foot value after converting a one bedroom to a two bedroom apartment in Bed Stuy, since the total number of square feet is not going to change.
Furthermore, the converted two bedroom is likely to have to closer to 800 sqft (the one bedroom median) than 1,000 sqft (the two bedroom median) since, after all, it used to be a one bedroom. Let’s split the difference and assume it’s a bigger one bedroom at 900 sqft.: that’s still 10% less than the median two bedroom, so we’re not going to end up with a full-sized two bedroom apartment.
Taking those adjustments into consideration, we can expect the actual increase in value to be much lower: $1,924 – (5.6% of $1,924) – (10% of the previous result) = ~$1,645. That’s only $26 more than the one bedroom average, and almost certainly not worth the cost of the conversion.
This is obviously a simplistic analysis, but I was skeptical that you could take an existing apartment that’s presumably been designed for a certain number of occupants, shoe-horn in an extra bedroom and get something substantially more valuable. The basic reason for this is that it does not take into account the fact that you’re not really adding value from the renter’s perspective, and what the renter is willing to pay for an apartment is all that really matters. You’d be better off adding nicer finishes, which do add a lot of incremental value (but that’s another post.)
This analysis is also specific to Bed Stuy, and it may actually make sense in other areas where the numbers look different–say where two bedroom apartments have a higher or similar per square foot value than one bedroom apartments, or where the difference in size between typical one and two bedrooms isn’t so pronounced.
If you want to dig deeper into this kind of data & analysis, check out the free trial of our Competitive Intelligence product!