PHOENIX-In recent months, multifamily acquisitions and dispositions have focused on the huge, class A sales such as Bascom Arizona Ventures LLC (which made its return to the market in late 2012) and Equity Residential Trust (which has been systematically shedding its local portfolio since early 2013).
In the midst of this "big deal" news, some investors are eyeing the lower classes for purchase. Area experts tell GlobeSt.com that lower cap rates and yield are the primary reasons why buyers like the older properties. Notes Brad Goff, principal with Apartment Realty Advisors: "Chasing yield through value-add ownership is the best way to go these days."
Both Goff and Orion Multifamily Group co-founder Alon Shnitzer acknowledge that the concept of value-add is still somewhat new to investors. Goff points out that, during the Great Recession and the aftermath, there wasn't much incentive to upgrade, given the lower occupancy. But given the fact that renters are coming in droves to rent apartments these days, there is more incentive to upgrade. Furthermore, Goff points out, renters are more astute, and they want high-class fixtures, countertops and amenities, even in class B properties.
As such, "many buyers out there are looking to take the 1980s properties, especially in good locations, and bring them from a class B to class B-plus," Goff adds. Even something as small as adding a washer/dryer combo to a unit can increase its value in a renter's eyes, Goff goes on to say.
Then there is the fact that class A product is becoming a little too pricey to buy. "A couple of years ago, investors could have purchased class A product for a lot less," Shnitzer observes. "Now class A prices are starting to hit up against replacement costs." Once those investors figure out it's less expensive to build rather than to buy, "that's when buyers pull back and think about other strategies," Shnitzer says. "Buying class B product has become another avenue."
What's also helped the class B become more attractive to buyers is that it's more attractive to lenders. Shnitzer comments that the Phoenix apartment market has only just stabilized, especially on class B product. "Typically lenders don't want to lend in Phoenix on buildings at are less than 90% occupied," he remarks. Recent figures point to the fact that class B occupancy is close to 94%, however, meaning lenders are more kindly disposed to financing class B multifamily property transactions.
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