New Market Forces are Changing Multifamily Value Add Strategies

In the old, pre-pandemic, days, it used to be a little easier to generate value-add returns. Investors could buy a property, make some cosmetic upgrades and earn large profits.

But it’s not so easy anymore.

“It’s difficult to get supplies,” Tom MacManus, president, MONEY360, said during a panel discussion at the GlobeSt. Apartments Spring 2021 virtual conference, held this week. “So the play to renovate and to reposition an asset today is not what it was at one time in terms of cost, timing and expertise.”

The money chasing apartments is also compressing yields. Add in the difficulty raising rents in some markets after COVID struck, and value-add plays make a lot less sense. “There is so much uncertainty around just where it rents are going to be,” said panelist Brendan Coleman, senior managing director, Walker & Dunlop.

Coleman says the calculus was a lot easier before 2020.

“Value add was easy,” Coleman said. “You go in. You fix up the kitchen, and you push rents $100 a month or something. Now I think that thesis is not really playing out with everything else that is going on.”

Coleman thinks many investors may prefer buying a newly completed property.

“I think we’re seeing a shift towards core-plus or buying properties as they’re delivering and taking only lease-up risks,” Coleman said.

However, some groups are still interested in value-add plays. Bobby Khorshidi, president, Archway Capital, sees requests for these projects coming through the pipeline again.  “Where the migrations are happening, primarily in the Sunbelt, I do believe in value-add strategies,” he said.

Trevor Koskovich, president, Investment Sales, NorthMarq, sees many of the same trends in the Sunbelt.

“If you’re in a market that’s got a real upward trajectory with net immigration, like Phoenix, Charlotte, Raleigh and certain parts of Florida, you can do exactly what you were doing pre-COVID [with value add] or even better in some cases,” Koskovich said.

While value-add plays are uncertain in multifamily, they’re even more difficult in sectors like office. With uncertainty around how people come back to work, projecting three or six months into the future is dicey. But office leases are often 10 or 15 years, making predictions even harder.

“It’s really hard to underwrite from here to there, wherever there is, on a value-add perspective,” said Chris Niederpruem, managing director, group head, Real Estate Finance, CIT Group. “It is much more challenging now than pre-COVID.”