Class B & C Investors Circling Secondary, Tertiary Markets
With demand stronger than ever, competition is stiffest for older properties with potential.

Sterling Hills Apartment Homes, Johnson City, Tenn., is a 216-unit apartment community acquired in September by Monument Capital Management. It was the firm’s first acquisition in Tennessee and is part of Monument Opportunity Fund IV. The firm has been seeking properties in markets like Johnson City that have strong job growth and major universities. Image courtesy of Monument Capital Management.
Fueled by strong employment and a growing group of renters by choice, investor exuberance for multifamily properties is spilling over into older properties as well as secondary and tertiary markets. Buyer older properties and renovating them, meanwhile, can offer better returns.
“There is so much money chasing value-add type investments today. It’s great to be a seller. It’s very, very competitive to be a buyer,” said Rick Hurd, chief investment officer at Chicago-based Waterton.
Further, bringing older properties up to modern standards, keeping rents reasonable and making a decent return in the process is a challenge since renters at every level are looking for renovated kitchens and bathrooms, smart technology and lots of community amenities.
Multifamily investment activity was strong for the first half of 2019 with volume reaching $77.5 billion, up 13 percent year-over-year, according to Multifamily Market Q2 2019 Marketbeat report. Volume rose in all U.S. regions with secondary markets seeing the strongest growth. Cushman & Wakefield noted transactions rose the most for the first part of the year in several Southwest markets like Dallas ($4.2 billion, up 6 percent); Austin, Texas ($2.1 billion, up 57 percent) and Phoenix ($4 billion, up 36 percent).
Charles Foschini, Berkadia senior managing director, said it’s a “great time to be a borrower for the amount of capital that is available in any given transaction.”
Chasing Yield to Bs & Cs

Roberto Pesant, Managing Director, Investment Sales for Berkadia in South Florida’s tri-county area. Photo courtesy of Berkadia
With the competition for Class B properties heating up, some are turning to C properties and considering new markets.
“The returns investors we were achieving in the B space four and five years ago ended up bringing a lot of capital into the B space. The competition got fierce and those returns were less achievable. There was a widening to allow for the C properties,” said Roberto Pesant, managing director, investment sales for Berkadia in South Florida’s tri-county area.
Pesant also said Class B investors who previously focused on primary markets are now looking for yield in secondary and tertiary markets. In South Florida, that includes western parts of Broward and Palm Beach counties, he said.
Pesant said Miami-Dade County investors, particularly foreign investors, tend to hold onto their assets longer, so those multifamily assets are thinly traded. He has also seen more institutional capital, including life companies and pension fund advisors, often partnering with firms that have been operating in the Class B space.
“Groups that would have been looking for the newest, shiniest Class A downtown asset now have modified their strategy to allow for Class B investments,” Pesant said.

Christine Espenshade, Managing Director and Co-Head of JLL’s Multifamily Capital Markets. Photo courtesy of JLL
Some investors looking to maximize yield are changing location strategies, perhaps going to tertiary markets for the first time, said Christine Espenshade, managing director and co-head of JLL’s Multifamily Capital Markets.
“I was talking to an investor the other day who bought an asset in Florence, S.C., because it was a 7 cap,” she said. “Everything is a 5 to 5.5 cap in secondary markets. They are going to tertiary markets to get yield and going down the quality curve.”
In early September, Monument Capital Management acquired Sterling Hills Apartment Homes, a 216-unit multifamily community in Johnson City, Tenn. It was the Miami-based real estate investment firm’s first property in Tennessee and is part of Monument Opportunity Fund IV.
“We launched the fund in May and completed two acquisitions: one in Johnson City, Tenn., which is about as tertiary as you’re going to get,” said Stuart Zook, Monument principal.
Zook likes markets that have strong job growth, major universities and active economic development organizations. Johnson City, home of East Tennessee State University and several major employers, checked those boxes. The firm owns about 25 properties totaling more than 5,300 unites throughout the Southeast, Midwest, Mid-Atlantic and Texas, and is pursuing more opportunities in markets like Chattanooga and Knoxville, Tenn.; Charleston, Spartanburg and Greenville, S.C.; Raleigh, N.C.; Orlando, Fla.; Houston; Phoenix and Tucson, Ariz.
Tucson, Zook noted, doesn’t have a lot of new construction, so there is less Class A product as competition. “Bs can be turned into B-plus pretty easily.”
Morgan Properties, a privately held firm based in King of Prussia, Pa., is located in 15 states and is the largest owner in Maryland, Pennsylvania and New Jersey. A value-add player that owns and operates about 51,000 units and has about 76,000 under management, Morgan has been expanding beyond the Northeast and Mid-Atlantic to Southeast states like South Carolina, Tennessee, North Carolina and Midwest to Ohio and Nebraska.
Brent Kohere, senior vice president of operations, said Morgan prefers primary markets, but they are looking for areas with strong job growth and will go into some secondary markets. Kohere said the company likes to get critical mass.
“Our goal is to get a least 2,000 [units] in a geographic area so we can put a regional manager there and have a hub,” Kohere said.
Rent Control Impacts

Henry Manoucheri, Chairman & CEO of Universe Holdings in Los Angeles. Photo courtesy of Universal Holdings
Espenshade said investors are shying away from New York City after New York state legislators passed changes to rent control laws in June, including the elimination of vacancy decontrol.“It really changes the risk profile of New York properties,” she said. Those investors are looking instead in places like Philadelphia and Stamford and Norwalk, Conn.
Henry Manoucheri, chairman & CEO of Universe Holdings in Los Angeles, a privately held investment firm specializing in value-add opportunities, said he has seen deals fall apart in California since the passage in early September of AB-1482 Tenant Protection Act of 2019, a rent control law aimed at easing California’s housing crisis. He said investors will need to change their strategies by writing longer business plans and underwriting for lower turnover of units.
For the past year, in anticipation of more rent controls in California, Manoucheri has been shifting his investment strategies. He’s been seeking out investments further north like Santa Barbara County and Ventura County, where Universe teamed up with Hanover Financial LLC equity investor Essex Property Trust to acquire a 400-unit apartment community, Capes at Ventura, for $100 million. The joint venture invested another $6.5 million to upgrade kitchens with new stainless steel appliances, Caesarstone countertops and plank flooring among other improvements. Outside the team added a pool cabana, renovated the fitness center and improved landscaping.
Manoucheri also likes San Diego and Orange counties and the Inland Empire. But they have been trying to diversify due, in part to rent control. In the past year, he has been actively bidding on properties in Seattle, Denver and Salt Lake City–all markets with high barriers to entry that have strong job growth. Manoucheri has also opened an East Coast office and has begun bidding on properties in New Jersey and Connecticut.
“I expect to see at least 50 percent of the country over the next five to 10 years will have some form of rent regulation,” Waterton’s Hurd said.
Growing Value-Add Portfolios
As for upgrades, Class B renters want granite countertops in their baths and kitchens, too. Larger multifamily investors who can buy in bulk can provide those upgrades along with faux wood flooring. Topping in-unit amenities are dog parks, playrooms, fitness centers and package systems.
Kohere and Rob Geddes, vice president and director of asset management at Morgan Properties, said the key to doing a proper value-add strategy is focusing on more than just one component.
“Unless you look at the whole package, especially in a B or C marketplace, you are probably not going to see the level of return,” Kohere said.
Upgrading kitchens generates the most tangible results in rent increases, Kohere said, adding a company like Morgan has the volume buying power to be able to install better quality cabinets and granite countertops.
“Because of the volume we deal with we are able to get it at a price point to put in a Class B without breaking the bank and still get the return we want,” he said.
A popular upgrade is in-unit washers and dryers, but Kohere and Geddes noted the older properties often create challenges because the plumbing and wiring weren’t built to handle the appliances. Once the installations are done, that frees up laundry rooms and Morgan repurposes them as bike and resident storage rooms, fitness centers, business centers or package rooms.
Geddes said the company is working with Amazon and has installed Amazon hubs for package storage in about 30 properties.
Asked about smart technology, Kohere said they are taking a cautious approach and have been experimenting with various products in a few properties with plans to roll out to about another dozen shortly. For now they are focusing on door locks and thermostats.
Zook said Monument is doing a residents’ survey at Sterling Hills to see what kind of amenities they prefer on the 35-acre site. He already plans on upgrading the pool and fitness center but is considering adding a fitness course as well as outdoor kitchens and fire pits. In the Midwest, residents want covered parking and everybody wants a business center with WiFi and wireless printing.
“You need WiFi the same way you need air and water these days. It’s expected at all demographics,” said Foschini.
In recent months, Waterton has re-entered Las Vegas and Austin, where they see tremendous jobs and population growth. While the Las Vegas acquisition—a two-community portfolio with a total of 720 units—was a luxury property, the Austin transactions were “true value-add deals,” Hurd said.
Waterton acquired the three-property, 950-unit, garden-style, 1990s-era apartment portfolio in August. Hurd said all of the units at Madison at Stone Creek, Madison at Wells Branch and Madison at Scofield Farms will get renovations. That’s a bit unusual, he said, noting that in most value-add deals only about 40 to 50 percent of the units need upgrades. They typically install hardwood flooring, stainless steel appliances and hard countertops.
Hurd said Waterton renovates about 1,500 units a year and leverages its relationships for national contracts and buying power. He said they like to get upgrades to common areas completed within six to 12 months. Top priorities are putting in dog parks and dog wash stations, package systems, bike storage and bike repair areas and outdoor spaces like firepits.