Investors Shift to Renovated Core Assets

REDWOOD CITY, CA—Finding value doesn’t always mean value-add. At least that’s what a number of investors in the Bay Area are experiencing. With apartment demand rising, a vacancy rate near or below 4% and regional unemployment at its lowest level since late 1990s, many investors are investing in fully renovated core assets in core markets.

In this exclusive, Adam Levin, senior managing director, and Robert Johnston, senior vice president, with Levin Johnston, a division of Marcus & Millichap, discussed these market shifts and where investors are finding value.

GlobeSt.com: How do you define exit properties and what is fueling the shift to those properties?

Levin: By exits, we mean properties that have been recently renovated and have already gone full cycle with their current owners. We’re seeing an increasing number of these properties hit the market, offering multifamily investors an opportunity to invest with lower risk and in-place NOI that will sustain long-term cash flow.

Johnston: The key is to be selective about the market. For example, we have two exit-type listings right now–both of which are located in core Bay Area markets.

180 Flats in Redwood City is a 48-unit community that has recently undergone significant exterior and interior renovations, including in-unit upgrades such as designer finishes, updated kitchens and new community amenities such as open community courtyards and a new dog park. Beyond its capital improvements, however, is the property’s location in close proximity to the nation’s top tech employers such as Box Inc., Google, Oracle, Electronic Arts Inc., Stanford, Facebook, Cisco Systems, Visa and Sony, among others.

Another example, Station 401@ Poplar, is an extensively renovated 31-unit community in San Mateo that offers updated kitchens and bathrooms, new dual pane windows and doors, and recessed lighting in unit interiors, as well as new gates and outdoor community barbecue area.

Levin: The true appeal of Station 401 is its location in San Mateo, which is among the most affluent and prosperous counties in the nation with the median home price exceeding $1.2 million. This places home ownership out of reach for most residents, resulting in a very strong investment opportunity for multifamily investors. Both of these properties represent an opportunity for investors to acquire core exit assets in core Bay Area markets.

GlobeSt.com: Does this mean value-add investments are more of a long shot in the Bay Area?

Johnston: Not necessarily. It simply means there are increasing opportunities in the property exit category. That said, there are still value-add opportunities to be found–they are simply fewer and further between.

For example, we recently directed the $13.6 million acquisition of 10 Birch, a 27-unit multifamily community located in the highly sought-after Mount Carmel neighborhood of Redwood City. This is a value-add property and the buyer is planning immediate improvements throughout the asset.

Levin: 10 Birch was a unique investment opportunity in a top-performing core market in the region. The property is a trophy asset for an experienced multifamily investor.

When the property went to market, it immediately attracted a high volume of investor interest. This demonstrates just how competitive the value-add market has become.

GlobeSt.com: How does this sale speak to the trend of investors shifting to property exits?

Levin:  This transaction’s location and competition speak to the shift we’ve been discussing. As more fully renovated properties enter the market and value-add assets decline, many investors will shift to exit properties not only out of interest, but out of necessity.

Johnston: It’s important to note that this doesn’t mean value-add is gone forever. It simply means investors need to look at the whole market and understand where the opportunities really lie at this point in the cycle.