By Mary Ryan, Contributor
Thanks to Chip and Joanna Gaines, Martha Stewart, HGTV, DIY Network, Pinterest and numerous other home-focused professionals, programs, websites, blogs and publications, home improvement and house flipping have become trends embraced by nearly every American on some level. The general public is now privy to a secret that commercial investors and property owners have known forever: strategic improvements can add outsized value to assets, whether you plan to hold it for the long or short term. For many of these commercial organizations, multifamily properties have provided the most return on investment, especially over the past decade. The factors driving the strength of that sector have seen and could continue to see impact from the COVID-19 fallout, however, calling into question the wisdom of further investment going forward. As the full effect of the downturn hits home for the multifamily realm over the next few months, sellers may have to work harder to attract buyers to their opportunities. Property management could be a differentiator amid the competition.
The Impact of Change
Since the end of World War II, suburban home ownership has represented the pinnacle dream for most Americans. People have considered apartment living a temporary solution for those unable or unwilling to live with their parents or lacking the funds to afford a house. The recent urbanization movement — fueled by Millennials and Baby Boomers seeking the convenience, flexibility and freedom provided by city living — has eroded that perception, resulting in record demand for multifamily accommodations. Developers have built millions of new units to accommodate this shift, though the need to recapture the capital spent on local policy compliance and permitting, construction materials, labor and land through high rents have made many apartments unaffordable to the greater populace.
The need to remain competitive with similar properties and justify high rents, especially in core city markets, also warranted inclusion of new and better on-site amenities for tenants. Some of these include communal workspaces, enhanced gyms with classes and personal training, optimal bandwidth for internet and streaming services, community-building creative space and classes, transportation and rideshare facilities, and snack, dining and delivery options and coordination. Most of these properties were built by REITs and other well-funded firms with long-term hold plans and have not traded or traded at low cap rates.
The Hunt for Value
For existing properties, the vast majority of multifamily activity has come from another avenue. Investors and owners with high risk thresholds and short-hold philosophies have seen upside opportunity in Class B and C multifamily properties where high cap rates, below market rents, obvious need for capital improvements, and strategic locations offer the potential for significant return in exchange for moderate investment. Renovating as few as 20 percent of the units and adding curb appeal through landscaping, paint and fencing are enough to entice tenants to pay more in rent, thus increasing the Net Operating Income (NOI) and value of the asset to buyers. However, the quick and substantial returns on these properties has created something of a feeding frenzy for them, raising pricing and lowering cap rates to levels where new owners must rehab as many as 80 percent of the units and raise the rents for all the units to balance both the cost of the acquisition and the renovations. Markets such as New York, Seattle, Los Angeles, San Francisco and Boston where investor demand for redevelopment outweighs supply have seen both the volume of deals and size of properties traded decline, though pricing continued to climb until March of this year.
Check out: Rentcafé’s monthly rental report for the most up-to-date average rental prices in NJ
The Road Ahead
The economic downturn associated with the COVID-19 pandemic had an immediate effect on the multifamily real estate market. Deals in process slowed as buyers and investors worked to predict future events and adjust expectations. Considerations included the impact on rent growth of both the sheer volume of unemployed and underemployed people as well as a possible shift away from urban locations resulting from remote working flexibility. Most in-progress transactions closed, but some pipeline offerings disappeared despite the relaxing of restrictions on financing sources. Units under development also saw delays from the construction moratoriums. They will likely be completed, but proposed new developments deferred. Future developments could also look notably different from the past as tenant demand for amenities in common spaces adjusts to reflect safety practices and regulations until a vaccine allows for the return of some normalcy.
Management as an Asset for an Asset
COVID-19 has changed our world forever, and no one is sure what the future holds. In such an environment, the right property management provider can be a true differentiator for both buyers and sellers in determining which transaction to undertake. Vetting and proposing a quality management firm to potential buyers of a smaller asset can eliminate a major post-acquisition task, especially for non-local buyers, and ensure the retention of asset quality going forward. Many smaller owners have also never retained a property manager for their buildings, preferring to self manage. Outlining the financial and operational advantages of a management firm can decisively swing a buyer in your direction.
Suggesting a management partner for buyers of or investors in a larger property offers a potentially cost-saving alternative to an in-house management team. A proposed provider which is also the incumbent management firm of that asset ensures stability for tenants, a seamless transition from owner to owner, and uninterrupted operation due to knowledge of infrastructure, systems and history. In addition, management firms that serve larger assets generally have access to more best practices, resources and tenants, potentially adding value to an already valuable property.
Lone Eagle Management is a leading multifamily property management firm in New Jersey. Whether you plan to sell or hold we can help you understand your asset value, or how to get more value out of your assts? Give us a call!