Over the past several years, equity in the apartment industry has spent a lot of time and effort pursuing value-add acquisitions.

At first glance, it's easy to see why. Generally speaking, value-add communities are older properties in need of renovations to remain competitive. As a result, their acquisition costs historically have been lower than those of core communities – properties that were built fairly recently, have strong operating fundamentals and are in great locations.

When you couple the lower acquisition costs of value-add communities with the ability to significantly increase rents through renovations, there is the potential for higher returns than you might find from core investments. 

But now, some owners and investors who have dabbled in the value-add arena – including JVM – have become more cautious when pursuing these opportunities. That's largely because the prices of value-add properties have increased with all of those investment dollars chasing them, reducing the opportunity to get those desired returns.

Instead, many of these investors are embracing the attributes of core properties.

The Issues with Value-Add

The rising costs of value-add properties have definitely given some multifamily investors pause. When you combine these prices with the cost of renovations like granite countertops, stainless-steel appliances and vinyl-plank flooring, you can sometimes end up paying close to core price and getting a core-like return at the end of the day.

Value-add properties also can saddle owners with other unexpected expenses that don't really impact a community's ability to drive rents. Since these properties typically are older and may not be in tip-top condition, new owners may find themselves replacing major physical components such as roofs, asphalt, concrete, and windows. They may also have to replace or retrofit air conditioning systems since federal law has mandated the phase-out of a refrigerant that has been deemed environmentally unfriendly. The list of all the costs that have nothing to do with the value-add proposition can be difficult to ascertain when analyzing a value-add investment opportunity, and will cut into projected returns very quickly. 

The Attractiveness of Core – and the Benefits of Self-Management

As a result of the current environment, many investors in the multifamily space have increased their interest in core properties. These communities may carry less risk and can often produce comparable returns when the pricing for value-add is overheated.

Additionally, owners who manage their own core communities efficiently may find opportunities to create some extra value out of these properties.

Self-managing a property allows an owner/operator to pivot when market conditions change and quickly adjust operational strategy and tactics as needed to maximize revenue. Decisions on capital improvements can be made much more efficiently, and opportunities to increase ROI can be seized upon much more quickly. When a third party is managing a community, the communication and decision-making processes between owner and manager can be cumbersome and inhibit property performance.

Also, when an owner manages its communities, it can ensure that all of the revenue management and operational software and reporting is exactly how it wants them.  Most importantly, we feel the level of customer service for residents can be significantly higher when the owner is managing the property and cultivating the relationships between the onsite team and our residents.  

As anyone who has been in the apartment industry for any length of time knows, there is a continual ebb and flow in the market. With construction costs continuing to increase, value-add communities will always be an option for investors and owners like JVM. However, we believe the risk vs. reward differentiation between core and value-add warrants close scrutiny in the current market environment where pricing is at historic levels for all multifamily. Core properties may just be a more attractive investment option today.