By Carl Christie
In a competitive real estate market, multifamily portfolios are hotter than ever, but how do new owners add value to their recent investments? Quality multifamily properties are defined by location, size, construction type and amenities; and developments that meet all these standards in these categories do not stay on the market for long. With these portfolios, there is great competition and historic low cap rates, so active buyers need to add value when and where they can.
When we talk to investors about how to add value to their multifamily property, generally they employ one or all of the following:
Renovating and updating
In older buildings, upgrading areas of daily use like kitchens or bathrooms can be an investment with significant added value to the property. Other possible updates include hallway and landscape improvements, as well as having chargeable amenities like parking and storage. Renovating or updating is usually the best way to raise rents in the units, therefore increasing the overall value.
Another advantage of some older properties is extra space or land that was unused in the original construction. Owners who take the opportunity to expand can create more units in existing buildings, or might also seek to build an additional unit adjacent to the existing one on the land they purchase. In some cases, a more spacious unit can be expanded to include one or more additional bedrooms. For instance, an older unit may have been constructed with both a living room and dining room, and owners could choose to convert one of those rooms into a bedroom for a value-add.
Simply raising rents
The answer might not be to make changes right away. Owners may choose to raise rents due to the market changing over time. With long-term ownership, many do not keep up with current rents, so a gradual rent increase over a two-year period is generally best. For example, an investor purchased a property from us North of Boston, mid 2015. He offered all tenants a new lease (as most tenants were tenancy at will) at a modest increase of 10% as the current rents were close to 20% below market, every tenant stayed. He has recently renewed all the same tenants at an additional 10% increase and all tenants again stayed on.
Reposition or redevelop a building into multifamily units
A somewhat non-traditional route to finding value in multifamily units is to reposition or redevelop a property that wasn’t originally used for residential purposes. Today, industrial space, offices and even retail buildings are all being redeveloped into multifamily if the building permits. This trend speaks to the current need for housing, but it also gives owners an opportunity to build or design something new. This is a very interesting opportunity for owners because they can design and even brand the new development to attract a specific buyer or tenant. With these insights and control, owners can attract tenants looking for a building with character or a more unique feel. It is important to note, however, that this option is not a fit for every building, and owners need to make sure the structure allows for this kind of redevelopment.
In the multifamily market, demand is so high that often owners are interested in buying properties that don’t necessarily check all of these boxes right away. Developments like these present a great opportunity for buyers to add value while also keeping up with current trends that buyers like to see.
For more information on other major markets, read NAI Hunneman’s Q3 Market Recap here.
Carl Christie is an executive vice president with NAI Hunneman’s Capital Markets Group specializing in the disposition of multifamily assets throughout New England.