For investors, security and potential are a premium. In today’s real estate market, higher apartment prices have created smaller yields for many looking to grow their capital. For some, higher prices represent a relatively safe investment, but for many, high returns come first. Value-add properties represent opportunities for greater reward, and their sales have been on the rise.
In 2015, multi-family investors acquired $32.7 billion in value-add properties which represents 22% of all apartment sales last year. Those numbers show a significant increase from 2014, where $20.6 billion in value-add deals represented only 18% of apartment sales.
Investors have also recently spent more money on “core” apartment opportunities as a conservative way to preserve capital. Higher class apartments are trading at cap rates around 3%, which doubles 10-year yields on treasury bonds at 1.78%. According to RCA Senior Vice President Jim Costello, these rates are rerouting investments from bonds and other conservative securities to alternatives in real estate.
However, institutions are looking for much higher yields. In some cases, like real estate investment management firm Waterton based in Chicago, 13-14% leveraged IRR’s (internal rate of return) are being targeted.
These higher returns are becoming more prevalent because of the nature of value-added investments, and the relative security in certain markets. In Chicago for example, Waterton is able to target 13-14% because of the lack of competition. Class-B and C apartments are renting for less than new construction, and maintain a lower vacancy rate than Class-A apartments. In these types of markets like Chicago, units will stay filled while the returns rise making multifamily value-add deals more appealing.