There are ways to drive returns on value-add multifamily investments without spending a fortune on redevelopment.
By Max Sharkansky (NREI Online Article) — The appetite for value-add multifamily investments remains strong—and in light of this increasing competition, many investors are struggling to identify and secure assets that present high-reward opportunities.
While some investors have turned to extreme measures, including taking on projects that require extensive remediation and complete overhauls—or even repurposing entirely different product types for multifamily use—some of the greatest opportunities for growth and stability lie in strategically identifying and refreshing functional, yet under-managed vintage communities.
With a strong sourcing and repositioning plan in place, investors can still take advantage of opportunities to acquire ‘diamond-in-the-rough’ multifamily properties that present high potential for growth at this point in the cycle. We’ve included a few strategic approaches below:
Select submarkets with sustained growth and livability
Top-of-mind for many multifamily investors is the current point in the real estate cycle and impending market correction. The good news is that we’ve been in a slow growth economic cycle for several years, which has recently been bolstered by changes in policy and new employment opportunities.
Consequently, we anticipate continued upside for the next few years, and further, that many multifamily markets across the country will remain resilient even in the case of a downturn.
The key is selecting submarkets that are experiencing increasing population growth year-over-year, job growth that includes the influx of a diverse mix of employers and those that are located in regions that present a high quality of life—vibrant areas where today’s multifamily residents want to live.
For example, we recently added the eleventh apartment community to our Portland, Ore.-area portfolio in just over three years. The greater Portland market demonstrated strong fundamentals that brought it through the economic downturn of a decade ago relatively unscathed compared to many other markets, and we have been particularly bullish on Washington County submarkets, as in recent years the area has emerged as the tech hub of the Pacific Northwest, as well as expanded its presence as a sports apparel capital.
We expect well-positioned multifamily assets in continuously growing locations like Washington County to thrive, but as opportunities become scarce and competition high, it is also critical to keep an eye on newer emerging markets.
In the West, we are seeing that certain submarkets of Salt Lake City and Denver are demonstrating similar fundamentals that the Portland area has for the last several years.
Identify under-managed communities in need of a refresh
Properties that are not only under-maintained, but also under-managed (and under-amenitized), present the potential for a significant return on investment even in softening conditions.
For example, several of the multifamily communities that we acquire are of a 35-to-50-year vintage and on the second or third generation of family ownership. Many of these highly-functional communities have the spacious floorplans and some of the basic amenities that today’s residents desire, but the previous owners lacked the expertise or passion to take the assets to the next level and are simply ready to exit the market.
We anticipate that these dispositions will continue in this climate, but investors must aggressively pursue these transactions and leverage any existing broker relationships in attractive submarkets, as many will not make it to market.
When it comes to these types of vintage properties, a little TLC can go a long way as upgrading curb appeal through a refreshed façade and the addition of a handful of in-demand amenities can increase potential resident interest.
A fresh coat of paint, upgraded key and thermostat systems and the addition of outlets and charging stations—especially in markets with shifting demographics that include an influx of younger professionals—are seemingly small upgrades that go a long way in increasing curb appeal.
Further, many of these older properties do not have convenient ways for residents to submit maintenance tickets or pay rent online, something today’s residents greatly appreciate and look for in an apartment community.
Through identifying undermanaged, slightly-outdated properties, investors can see significant upside without tearing down any walls—or just a few.
Utilize rebranding techniques
Interior and exterior upgrades can be synergistically complemented by strategies that establish modern identities for properties, including ‘rebranding’ and creating or expanding a property’s online presence.
For instance, painting a property with a new color scheme, designing new signage and changing in the name can increase value by creating a strong community image and presence.
This new image should then be translated to a website and social media using the same colors and branding. The benefit of this is two-fold—first, it establishes the brand identity and visibility of the community for prospective residents, potentially leading to leases signed sight-unseen, and second, when done right, it creates a centralized reference and point-of-contact for existing residents to have any other questions answered or concerns addressed.
Further, we’ve found that utilizing a vertically-integrated property management platform and acquiring multiple properties in select submarkets is beneficial to strategically rebranding a property to fit an area’s demographics and demands.
Investors are becoming increasingly creative in order to secure a chance to take advantage of still-sky-high demand for multifamily housing. This creativity does not always mean that drastic value-add renovations are required. By looking to new emerging high growth submarkets, sourcing under-managed properties and identifying ways to strategically rebrand, multifamily investors can still secure properties and find significant ROI.