Smart Bet: Focus on B and C Multifamily Investments

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As real estate developers continue to struggle to profitably deliver new multifamily product in an affordable price range, the answer to the ongoing affordability crisis may lie in older product. Specifically, Class B and C properties built 20 or 30 years ago.

According to the most recent Census, around 37% of U.S. households are rented, with consumer trends pointing towards continued growth in the multifamily rental market. As such, a popular investment strategy of recent years has been to acquire existing or older multifamily properties, upgrade it and create “new” inventory for budget-conscious individuals and families.

“B & C properties are and have been a primary investment strategy with respect to repositioning for a number of years,” added Brian Murphy, Managing Director of CIVIC Multifamily. “Lately, these properties are increasingly attracting national and institutional equity capital looking for yield.”

Here are some reasons why acquiring and repositioning Class B and C product can be a smart bet for investors.

Growing Demand

Working-class individuals have long been a mainstay of apartment living, but the millennial generation, which consists of around 85 million U.S. citizens born between 1977 and 1996, are putting off home ownership due to a variety of factors that include student debt, the rising cost of housing and a delay in family formation. The millennial segment is a large factor in the increasing demand for apartments across the nation.

There were approximately 1.25 million new units delivered nationwide in 2018  to meet this demand but most of the new construction is increasingly focused on Class A apartment buildings. Class A product comes with a much higher price tag and higher rents due to construction, land and labor costs.

So, despite an uptick in construction over the past decade, the percentage of rental units less than 10 years old remains at an all-time low of 9%, down from 24% in 1980, according to Apartment List. In that same time frame, the share of units older than 30 years has risen from 41% to 66%.

Opportunity Knocks

The increasing amount of older product means there is opportunity to renovate and reposition, which provides a needed source of affordability to meet the lofty demand for affordable housing.

To capitalize on this, investors should target specific neighborhoods with a focus on Class B and C assets in areas that are desirable to renters and have enough value-add opportunities to provide rent growth over the holding period.

With labor and land costs continuing to climb, developers are finding it more and more difficult to deliver new units in the $1,000 or under monthly rent range. Acquiring multifamily product at a discount is also difficult in today’s market. As such, the success or failure of an investment lies solely in the ability to create value or from the perspective of a renter, increasing a property’s desirability.

Increasing a property’s desirability can be accomplished with light value-add, in which cosmetic renovations are acutely focused to attain the highest value without driving up cost (Read More: The Art of Repositioning Multifamily Buildings Without Driving up Cost). Most properties built in the 1970s and 1980s mainly suffer from a lack of modern style. Developers and investors should focus on small improvements that breathe new life into a property.

Older, well located product can offer a number of avenues for creating value, including simple exterior, interior and operational improvements as well as improving property amenities.

Do Your Research

Another key to investing in older Class B and C product is research. Studying what rent levels are doing at market comps by floor plan and level as well as completing due diligence on the property’s submarket is crucial. From there, a strategy can be developed with improvements custom tailored to that market.

Instead of changes designed to push rents aggressively, the correct value-add approach results in a cost-effective rise in desirability while still keeping rent priced competitively to support a stronger potential for return on investment.

Older product is often undervalued and overlooked by institutional investors due to the substantial investment in time and resources required to reposition the property. However, a smart investor will see the opportunity and strategically invest in upgrades. With the right strategy, Class B and C multifamily properties can yield lofty returns as well as substantial NOI growth and overall capital appreciation.

Additionally, older product is essentially recession-proof, which is key for tenant retention and an important trait to look for in this uncertain economic climate.

CIVIC Multifamily – Real Estate Lending

CIVIC provides financing for multifamily property investment. Our bridge loan services are ideally suited to investors looking to renovate B & C Class multifamily real estate assets.

For more information about classes of multifamily real estate assets, or about our bridge lending services, email us at multifamily@civicfs.com. Also, check out our recent transactions to see how we can help add value to your investments!

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