Finding the Right Value-Add Multifamily Investment Opportunities

The commercial real estate fallout from the pandemic has opened up opportunities for value-add investments in the multifamily sector. But how do you go about finding these opportunities, particularly as demand for these properties has gone up?

There’s no single solution to finding these opportunities. Instead, you must employ several strategies to unearth them.

Search for Lower-Maintenance Opportunities

Rather than seeking multifamily properties that are due for a major rehab, look for ones that only require cosmetic makeovers. In other words, if you want to maximize the upside, avoid properties in need of extensive (and costly) electrical and plumbing work, for example. As an alternative, hunt for properties that could benefit from projects that may lift them from Class B to Class A, for instance, and lead to hefty rent increases. For instance, you might focus on upgrading amenities at a value-add property by adding a swimming pool or updating the fitness center.

Overall, the multifamily sector shows great promise for commercial real estate investors. Bryan Graf, Senior Vice President of Broadmark Realty Capital’s Western Region, attributes this to the ability to generate monthly cash flow to service debt, providing a greater chance of weathering an economic downturn.

“Even in tough times, the last thing people usually default on is their shelter,” Graf says.

Concentrate on Urban Cores

In many major cities, some workers and residents have abandoned central business districts and fled to the suburbs. This might pave the way to pick up value-add multifamily properties in some of those urban cores.

San Francisco is a prime example. The New York Times recently reported that during any given week, office buildings in downtown San Francisco are sitting at about 40% of their pre-pandemic occupancy levels, while the vacancy rate had climbed to 24% from 5% since 2019. In tandem with this shift, some renters have exited San Francisco’s core.

“Despite growing demand for apartments and a recovering job market, San Francisco is faced with a slower return to physical offices as more flexible remote work policies have been put in place locally in the past two years,” Veronica Grecu of the RentCafe apartment website said in August 2022.

Against this backdrop, savvy investors may be wise to pounce on value-add urban multifamily properties in San Francisco and other pandemic-scarred big cities. These properties could be repositioned in advance of a potential post-pandemic turnaround in urban business districts.

“As liquidity becomes more scarce, opportunities to invest in projects will arise. Some of the best deals typically occur during the most uncomfortable times,” Graf says.

Check Out the Suburbs

While some urban cores continue to recover from the pandemic, a lot of suburbs are gaining momentum. This is especially true in fast-growing states like Arizona, Florida, Idaho and Texas.

As a result, some investors are pursuing value-add multifamily assets in suburban areas. Propelling this trend are demographics as well as the reality that urban assets can be more difficult to stabilize than suburban assets.

In early 2022, WealthManagement.com reported that in major metro areas, values for multifamily properties were rising faster in suburban markets than urban markets.

“Prior to the pandemic, all the talk was about urban properties and walkability,” Aimee Morgan, managing director and co-head of multifamily valuation with commercial real estate services provider JLL, told WealthManagement.com. “That’s really been turned on its head since COVID. We’ve seen migration out of urban markets that are really reliant on mass transit into more suburban and car-driven markets — think Dallas-Fort Worth, Houston, Phoenix and Tampa.” In October, GlobeSt.com noted that increasing construction costs, lingering supply chain issues, ongoing labor shortages and a rising cost of debt for construction loans are making new construction less viable heading into 2023. Amid that environment, “a value-add strategy of buying older multifamily properties and renovating them is proving to be a lower-risk path to solid returns,” according to GlobeSt.com.

Broadmark Realty Capital is your trusted partner in real estate finance. We invest in the acquisition of multifamily properties and provide our investors with the opportunity to earn a competitive return. Visit our website to learn more about our acquisition process.