Value-Add Deals Gaining Steam

Great article in National Real Estate Investor that highlights some of our thinking: there are bigger returns and lower risks in buying value-add multifamily properties - particularly those considered class-B and class-C.

Our last post pointed out that these properties are considered to be "recession-proof" due to favorable demographics that have spurred high demand (more people need affordable housing), low supply (it just doesn't pay to develop these), and less sensitivity amongst the tenant base to employment and income (many tenants receive some form of government assistance to help maintain their standard of living).

This article reinforces all of that:

Yield-driven multifamily investors are more and more likely to focus on fixing up older properties.

“A lot of the activity will be in the value add,” said Jim Clayton, Ph.D., head of investment strategy and analytics for real estate investment firm Cornerstone Real Estate Advisers, speaking at the NMHC research forum, held April 6-7 in Chicago.

Higher prices on apartment properties have squeezed the yields for investors. Value-add investments offer an opportunity to push those yields higher. That might not matter for buyers simply looking for a safe place to park their money, but high yields are very important to institutional investors like pension funds and insurance companies that must meet their targets to fulfill their responsibilities...

Institution investors, on the other hand, are seeking much higher yields. A value-add investment product offered by real estate investment and management firm Waterton, based in Chicago, is targeting a levered internal rate of return of 13 to 14 percent, for example.

Waterton can earn that rate of return because of the intrinsic value of the apartment properties and the lack of competition. In some markets, the prices for class-B and C properties are below the price of new construction. So Waterton won’t face any risk of new construction stealing its residents.

“It’s the replacement value story,” said Philip Martin, vice president of market research with Waterton, also speaking at the 2016 NMHC Research Forum. “We have to have a relative housing value edge—versus apartments and homeownership… We’re typically looking for a deal that is 10 to 15 percent below median rents, where it’s a nice home at great value against all housing options.”

The fundamentals are also stronger for cheaper apartments, because so many new class-A apartments now crowd the market. The vacancy rate for class-A apartments was 4.1 percent in the first quarter compared to 3.0 percent for class-B and C properties, according to the researchers at brokerage firm Marcus & Millichap.

Entire Article Here:

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