Opportunity in Value-Add Strategies for Class-B Multifamily Assets
Great article from National Real Estate Investor mag that really reinforces the PGP strategy of acquiring class-B and class-C multifamily properties. We have certainly been finding value in that asset class and could not agree more with the conclusion of this article.
From the article:
Multifamily developers can capitalize on a huge unmet needin the market by buying and renovating older class-B and class-C apartment buildings.
“What is missing in this cycle is the construction of apartments that can cater to people earning the median income,” says David Schwartz, CEO and co-chairman of Waterton, a multifamily developer and manager based in Chicago. “We have an affordability crisis.”
Developers like Waterton specialize in “value-added” projects that improve older buildings, raising the rents and attracting residents who want more than a typical, aging class-B or class-C property, but who can’t pay the kinds of rents currently being charged for new class-A apartments. These value-added projects benefit from the strong demand for apartments overall, without having to compete with the hundreds of thousands of more expensive, luxury units now under construction.
Class-B and class-C communities are already doing very well in most parts of the country. The percentage of these apartments that are vacant is extremely low, below 3.0 percent in many metropolitan areas. “This is because developers do not often build class-B buildings,” says Barbara Byrne Denham, economist with New York City-based research firm Reis Inc.
Investors still pay significantly less for class-B and class-C apartment properties relative to income compared to class-A property prices. The cap rates investors accept when they buy class- B and C properties are now about 220 basis points higher than cap rates they accept for class-A assets.
“More and more investors are chasing these opportunities,” says Sebree. “There’s been a dramatic increase in sophisticated private capital looking for value-added investments.”