August 22, 2019
Moderator David Harrington with Matthews Real Estate Investment Services got the “Class Wars: Value-Add Proposition in Multifamily” panel at the recent Connect Texas Multifamily conference off the ground by introducing Carl Pankratz with Exponential Property Group. Pankratz shared the story of the 656-unit Forest Cove Apartments in Dallas, which EPG acquired in 2017.
“Sheet rock was missing in places, and 200 units were vacant,” Pankratz said. “There were people living there, who were not authorized to live there.” He concluded his story with the words: “That’s the value-add of yesteryear.”
In other words, the panelists said, today’s value-add prospect might not necessarily be that ground-up fixer-upper, something that needs to be rebuilt from the struts. Roscoe Properties’ Kelly Blaskowsky pointed out, for example, that value-add could involve boosting property management, adding some amenities, and then adding premium fees. “As clients are shopping those deals,” she said, “most of them have already been renovated. You have to go in with the mind-set of where the opportunities are.”
And, those renovations are pushing up the prices on the Class B and C properties. Marcus & Millichap’s Trey Caldwell shared the story of a client that had originally projected a three-to-five-year hold on a value-add property in the Dallas-Fort Worth area, then hit a five-year return in 18 months. That, he explained, is a function of job and population growth. “C deals used to trade for $30,000-$40,000 per door,” he observed. “Now, in the past four or five years, that’s in the $60,000-$80,000 range.”
Furthermore, those deals are becoming more difficult to find, mainly due to competition, according to Pender Capital’s Zach Murphy. “A lot of our clients are seeing more aggressive terms, especially in the Metroplex,” he said. “Nonrefundable money before they can even walk the units, those types of terms.” On the positive side, there is a lot of new money on the capital side. “We’re very bullish, particularly on the Texas market, particularly on the Dallas-Fort Worth market,” Murphy commented. “But we are concerned about debt acting like equity. If you’re taking an equity risk for a debt price, that’s a worry.”
Murphy also noted one huge value-add ownership problem; namely that owners blow through upgrade budgets long before the projects are completed. “The biggest mistakes we see is under-budgeting for value-add, both on the budget and time sides,” he remarked. Pankratz agreed, pointing out that “any way you can cut margins on materials, that helps a lot.” Blaskowsky, in the meantime, suggested that owners and investors keep an eye out for additional income opportunities, such as charging fees for lockers, or monthly amenities fees.
When Matthews closed out the session by asking the panelists about their crystal-ball predictions, the answers were as varied as continuing to absorb the units available and coming online (Blaskowsky), and the new normal being Class C properties selling for $100,000 per door within the next 12 to 18 months (Murphy). Caldwell, in the meantime, noted that “there is a lot of runway left, but I don’t know how long.”
Pankratz, with the last word, suggested that the strength of the economy will be directly tied to the 2020 presidential election, and the result of that. “In about a year, the primaries will be mainly over,” he said. “We’ll know the two possibilities.” Pankratz reminded the other panelists and participants that, during the last presidential election, treasury rates swung widely, which is something to watch. “How far apart are the candidates? Are their positions business-friendly, non-business friendly?” he added. “That will be the question.”
Pictured (l-r): David Harrington (Matthews Real Estate Investment Services), Carl Pankratz (Exponential Property Group), Trey Caldwell (Marcus & Millichap), Kelly Blaskowsky (Roscoe Properties), Zach Murphy (Pender Capital).
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Tags: Apartments & Multifamily