Purpose-built student housing, leased “by the bed”, provides a highly attractive multifamily investment option, generally at higher rates of return than market rate rental apartments of comparable quality and at somewhat lower volatility due to the favorable demand characteristics of the property type. The resulting risk-adjusted returns reflect the combined benefits of favorable population demographics and attractive financing options, which often include both long term fixed rates, and extended interest-only periods. Generally, student housing has only a modest value-add component.
Value Add Multifamily
“Value-Add” (market rate) multifamily investments provide for enhanced total returns as a result of capital improvement-driven increases to net operating income. Typically Class B / C suburban garden apartments, these properties are rented at rates below the competitive set at the time of acquisition, providing an opportunity to increase revenues through kitchen, bath and common area renovations. Often occupied by renters “for life”, rather than renters “by choice”, these properties exhibit less volatility in response to changes in the economic cycle than newly-constructed Class A properties, and are somewhat immunized from new market supply additions since new construction generally tends to be Class A by definition (i.e., no one builds Class C).
Commercial Income Property
Commercial Income Properties are generally pursued only in those instances where the existing property offers either the potential for appreciation through tenant credit up-trend (and resulting cap rate compression), or a “covered land play” providing attractive levels of current cash flow as part of a longer term repositioning or redevelopment strategy.
Historic Renovation and Adaptive Re-Use
This strategy is currently limited to the Washington, DC submarket where existing rent control laws and a significant supply of older, unrenovated properties combine to create the opportunity for two distinct, highly-differentiated multifamily investment strategies. In the first, older, occupied apartment properties are acquired in concert with organized tenant associations under Washington’s “TOPA” ( Tenant Opportunity to Purchase Act) legislation. Working with tenant associations to define a scope of beneficial capital improvements (generally including extensive kitchen, bathroom, and common area upgrades), our operating partner is able to successfully recapture a significant portion of the discount between pre-renovation controlled and post-renovation market rents. In the second strategy, adaptive re-use, older, unrenovated office buildings, hotels, schools, and even hospitals are renovated and converted into new, Class A rental housing at a highly competitive cost basis.