BUY, IMPROVE, REPEAT: VALUE-ADD ACTIVITY REACHES A FEVER PITCH

Rising prices and falling cap rates are driving investors to far-flung markets for the next hot deal.

Call it the HGTV effect on the multifamily market.

Late last year, San Antonio-based Lynd Living flipped an apartment building in just eight months for $15.5 million more than it paid. After spending $4 million on renovations and upgrades at Aqua Villa, a 280-unit garden-style community in Margate, Florida, that it acquired in March 2021 for $51 million, the firm saw rents increase more than 20%. That’s when CEO David Lynd knew it was time to sell.

The deal stands out as a searing example of the swift profits—and ongoing opportunities—available in multifamily’s white-hot value-add market, where operators scoop up properties with the intent to better them, increase the rents, and then sell them...

Just look at Irvine, California-based SB Real Estate Partners (SBREP), which in January announced the sale of a two-property, 365-unit portfolio in Phoenix, just five quarters after acquiring it, for $96.4 million. That was $41.1 million over the price it paid in late 2020...

In some markets, the value-add craze—and competition to snap up the best properties—already seems to be cannibalizing itself.

Take South Florida, where an influx of population during the pandemic has been ramping up the need for all types of housing.

“I’m seeing so much demand for value-add that there’s not enough product out there to create a ‘real’ value-add anymore,” says Matthew Jacocks, principal at Miami-based commercial real estate brokerage Lee & Associates South Florida. “The lack of current supply means the upside isn’t what it used to be. There’s just not enough supply of product that you can upgrade and raise rents at.”

That dynamic, and a winnowing supply of good candidate buildings in many markets, means that some properties are being bought and sold multiple times, with each new buyer adding their own incremental improvements. Once they do, they’re still sure to have multiple options for exiting it again.

“Now is a great time to sell because cap rates are low, and there is a lot of equity and debt capital,” says Jones at HGI. “There’s great liquidity in the market, and, when there’s great liquidity, it’s never a bad idea to sell.”

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