The investment market has become so competitive that even it’s difficult to find a good deal on a Class B asset in a secondary market.
The investment market has become so competitive that even it’s difficult to find a good deal on a Class B asset in a secondary market. That has made it necessary to expand consideration still further, to Class C assets and tertiary markets. For those with a vision, this offers a real opportunity to renovate, add value and improve return on investment.
But achieving satisfactory returns is more challenging today, as residents at every level are demanding greater amenities in the apartments they occupy, requiring even more of an investment to attract and retain tenants. In fact, investors that don’t renovate their Class B properties to incorporate higher-quality finishes and greater amenities will find themselves at a disadvantage.
A number of interesting approaches have produced some very successful results. Take, for example, Broder & Sachse Real Estate’s renovation of The Hamilton, a historic building in Midtown Detroit. A one-time hotel turned apartment property that had long since deteriorated, it underwent a $12 million “top-to-bottom” rehabilitation effort that incorporated restoration of historically significant details (which qualified for historic tax credits); replacement of mechanical, electrical, HVAC and plumbing systems and elevators; upgrades to unit kitchens and bathrooms, along with improvements to closet spaces, raised ceilings and installation of ceiling fans; and addition of building amenities including a fitness center and wellness studio, a secure package center, bike storage with accommodation for repairs, and a pet grooming and washing salon. Broder & Sachse also added trash chutes and a new freight elevator that accommodates wheelchairs.
While the improvements afforded a significant increase in rents, the investor-developer, influential on the Detroit scene, both helped existing residents find temporary housing during the reconstruction, financing the move where necessary, and committed to retaining their rental rates upon their return to the property. These efforts won Broder & Sachse an MHN Excellence Gold Award for Best Value-Add Renovation.
Many of the challenges the Detroit property presented are common to Class B and C communities: Often older properties, they require some reconfiguration to accommodate the preferences of today’s residents, including in-unit washer/dryers and package rooms, but they also may lack the basic electrical and plumbing requirements to support the necessities of today’s lifestyle. Gail Kalinoski’s article “Investors Flock to Class B Properties, New Markets in Search of Yield” and the related cover story “Hidden Gems” in the November 2019 digital edition detail some other such efforts, including Waterton’s undertakings in Las Vegas and Austin, Texas, inlcuding three properties that had never been upgraded. We’d love to hear about your own challenges in upgrading Class B and C properties and the solutions you’re devising.