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Value-Add Development Still Rewarding

Value-Add Development

Digested from “Value-Add Projects Remain an Attractive Option for Multifamily Developers” in National Real Estate Investor (8/23/16) by Anderson, Bendix

In many downtown areas near job centers, the supply of luxury apartment communities has hit its peak. However, developers still have financially rewarding opportunities to turn Class B properties into B+ apartment communities, improving the communities but keeping rents below the luxury competition.

In the second quarter of 2016, vacancies in Class B and Class C apartment communities averaged 2.7 percent, according to data from Marcus & Millichap. In this same period, vacancies in Class A communities averaged 6.1 percent.

Waterton, a Chicago-based value-added developer, has converted hotels and office buildings into apartment communities in job centers, but it also renovates underperforming apartment communities. The company will typically spend about $10,000 to $15,000 on building renovations for apartment communities with occupancy rates around 80 percent. As occupancy rates rise, so do the rents, usually by about $150 to $200 a month.

“There is about a 20 percent internal rate of return on that investment,” says Richard Hurd, Waterton’s chief investment officer. “Our minimum return is 15 percent.”

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