Multifamily Sector Insights: The Evolving Future of Value-Add

September 27, 2019

Multifamily Sector Insights: The Evolving Future of Value-Add

September 27, 2019

Value-add opportunities were a major topic for discussion earlier this year at the NMHC 2019 Apartment Strategies Outlook Conference in San Diego. More specifically, how are these opportunities changing, and how can professionals in the multifamily industry stay ahead of the curve?

This proved to be an insightful line of inquiry, as over $9.5 billion of sales were transacted in the value-add space in the first half of 2019 alone. Notably, the bar for successfully renovating value-add assets is being raised beyond new technology and surface-level improvements. Savvy investors will begin to evaluate value-add opportunities for their multifaceted potential over a longer investment period.

For our latest edition of Berkadia’s Multifamily Sector Insights, we reached out to Senior Managing Director Alex Blagojevich for input on what those multifaceted value-add opportunities will look like in the near future.

Value-Add Projects Less Viable for Short-Term Strategies

Markets adjacent to former hot-spots with cooling rent growth represent opportunities to win big with strategic value-add development.

Just a few years ago, higher cap rates on properties coupled with sustained rent growth, averaging 4.0%-plus nationwide, enabled investors to focus on performing cost-effective or “light” upgrades on aging assets in prime locations.

With rent growth projected to be more conservative going forward and consequentially tighter margins to raise rent, the value added by renovation upgrades will come from strategically attracting new prospective residents from higher income brackets.

Expect to see more investors leverage value-add plays as a means of being proactive in markets where effective rent in Class A apartment markets faces cooling rent growth. This approach will require investors to get creative and think long term to maximize value-add opportunities.

Value-Add Lets Investors Decide Their Own Fate

Effective rent nationwide increased 3.2% since September of last year, outpacing rent growth from the year prior.

In markets where rent growth is cooling or has already begun to cool, many investors are more inclined to take a risk on strategically transforming a property in a key location than to settle for the whims of the Class A market.

“It’s a way of controlling their own destiny,” said Alex Blagojevich, speaking to the latest trend in value-add investment strategies that bank on the persistent, nationwide demand for rentals. “There’s a lot of optimism about the future of multifamily. That’s fueling these deals.”

Due to this optimistic, future-facing approach driving investment, the strategy around value-add plays is evolving:

  • Investors are generally planning to hold assets for longer periods of time.
  • Asset improvements are being staggered across extended deal terms to ensure properties continue to gain value.
  • Capital is being invested in growing submarkets where expensive, built-out urban cores drive demand for value add assets.

Affordability Concerns Continue to Drive Multifamily Demand

Several economic forces continue to discourage Americans from saddling themselves with a mortgage payment. The same economic forces have created outsized demand for multifamily rental housing, a trend that most experts expect to continue over the foreseeable future.

  • Review Berkadia’s Affordability Examined report for more analysis on the historical impacts of wage and rent growth.
  • Visit last week’s post for a look at the top five submarkets where value-add investments have outpaced the rest of the nation.