By Mary Salmonsen (MultiFamilyExecutive.com Article) —
For its value-add multifamily strategy, Chapel Hill, N.C.-based Eller Capital has chosen to focus on purchasing, renovating, and repositioning multifamily properties originally built in the 1970s or 1980s. Its standard blueprint incorporates extensive renovations to the exteriors and residential units, as well as new, state-of-the art amenities.
Multifamily Executive asked CEO Daniel Eller about the details of his strategy, the returns he has seen, and how he expects the value-add segment to remain and evolve in the foreseeable future.
MFE: How have value-add and repositioning trends evolved over the past few years? What makes Eller Capital’s approach new, different, and profitable?
Eller: There is no asset class that is currently in as much demand as value-add multifamily. Over the last several years, a tremendous amount of capital has been invested in the space, and a significant amount of capital remains allocated to value-add opportunities. Over the course of the current cycle, property values have continued to increase to the point that the cost basis for some value-add multifamily assets may approach or exceed replacement cost. We have also seen a lot of value-add deals that were acquired by a buyer who never actually executed on a value-add strategy, relying solely on cap rate compression to deliver investment returns. There is a big difference between buying a “value-add deal” and actually executing a “value-add project.”
Our approach to acquisitions has always been to focus primarily on location, while envisioning what an asset could be as opposed to its current position in the market. The scope of our renovation program is typically extensive and is equally focused on improving unit interiors, building exteriors, and amenity packages that offer a resident experience, which is on par with a brand-new apartment community.
MFE: What are your go-to renovations or additions?
Eller: We typically will renovate the building exteriors to include new, modern architectural elements. Older amenity centers will be extensively renovated and reprogrammed to satisfy the demands of our residents in 2019, and unit interiors are renovated so that the finishes resemble new construction. We use stainless steel appliances, granite or quartz countertops, two-panel doors, plank flooring, wood blinds, and all new hardware, plumbing fixtures, and electrical fixtures.
MFE: What are some of the biggest challenges of renovating older buildings, i.e., maintenance, old/dangerous materials, etc.?
Eller: The biggest physical challenges are always the unknown maintenance issues resulting from years of deferred maintenance. Some of the biggest problems result from ongoing plumbing leaks or other means of water penetration. It is important to anticipate and budget for the unknown. Assets that are under renovation and are in transition are very challenging to operate and require constant communication and coordination between property management and construction management. Perhaps the biggest overall challenge is ensuring constant, accurate communication with all parties, and the balancing act of executing a major renovation project within an existing community of residents.
MFE: How are current residents of these communities affected by these conversions? Are residents provided with a chance to return and/or a legacy rental rate?
Eller: When executing a major renovation project, we work hard to minimize any inconvenience or disruption to the daily lives of our residents. On occasion, particularly in the case of large-scale exterior renovations that include door or window replacement, occasional disruptions are unavoidable. In these situations, it is critical to maintain timely (and accurate) communication with any residents that will be impacted. Residents will appreciate the long-term benefits of new doors, windows, and other property improvements, but they will not appreciate being continually inconvenienced. We always encourage residents to consider moving to a renovated unit within the property.
MFE: How do renovated luxury communities appeal to your chosen demographic?
Eller: We are active in some of the fastest-growing markets in the country where demand for quality rental housing exceeds available supply. There is a growing number of renters with excellent jobs who are unable to afford rental rates at newly constructed apartment communities but still desire to live in a modern, well-maintained apartment community with great amenities and interior unit finishes that are like those found in new construction. Our renovation program has been successful in fulfilling some of the demand for high-quality apartments at rental rates that are less than new construction.
MFE: How do you see this segment and strategy evolving in the future?
Eller: We expect this market opportunity will remain into the foreseeable future. Demand for apartments is projected to significantly outpace supply through at least 2030. The construction of new market-rate apartments will only fulfill a small percentage of the overall demand and will only be accessible by high-income renters. The value-add opportunity that exists through the execution of a high-quality renovation that revitalizes and extends the life of older, well-located apartment communities will continue.
MFE: Can you tell me about some of your current projects?
Eller: We currently have renovation projects underway at communities in Chapel Hill, Carrboro, and Winston-Salem, N.C., and Myrtle Beach, S.C. In Carrboro and Winston-Salem, we have started major renovation projects that will modernize and inject new life into three communities that were originally constructed more than 30 years ago. All three properties will undergo substantial changes to modernize the building exteriors, to improve and expand upon the current amenity offerings, and to provide updated interior finishes much like those offered in new construction. All three projects will be rebranded to reflect the new identities that are being created. Our project in Myrtle Beach consists of unit interior upgrades, a major clubhouse renovation, and expanded amenity offerings at a property that was originally built in 2007. The objective is to elevate the quality of the asset back to the top of the market and to remain in a strong position to compete head to head with new construction in the market.