Capturing Failed-Condo Opportunities

In a time of economic change, Laramar Group remains focused on its specialty for over 20 years—value-added investment. The company has raised a $350 million fund (up to $1.4 billion leveraged) to acquire value-added apartments across the country. Keat Foong, MHN executive editor, talks to Laramar CEO Dave Woodward regarding how the company is making the most of the challenging economic conditions. MHN: What is your apartment investment strategy? Woodward: Laramar has target markets nationally and key submarkets within these markets where we focus our investment activities. The properties that are targeted must meet many key investment metrics including (but not limited to): In-fill locations with high barriers to entry to new development; a large “affordability gap” that puts home ownership out of reach for many prospective residents; strong job growth in the surrounding area with a focus on the stability of the employment base; locations on major thoroughfares in order to drive leasing traffic; and a significant discount to replacement cost.Many of the value add deals that Laramar does are renovations where unit interiors and common areas are upgraded and amenities are added in order to allow the property to achieve higher rents and compete better in its submarket. However, value-add can come in many different forms including properties that are under-capitalized due to their ownership structure, under-managed due to poor on-site management and/or distant or non-existent asset management, or have inefficient financing structures. Value-add opportunities can also be due to owners who need to sell for a wide variety of reasons including needing liquidity due to other issues in their investment portfolios, disagreements with partners, estates liquidating assets, business plans not being achieved (such as “broken condo” deals), and partnerships winding down.MHN: Talks of the possibility of recession are pervasive. Have changing prospects for the national economy changed your apartment investment appetite and strategy? Woodward: At Laramar, we see the potential of a national recession as both a risk and an opportunity. Although a recession may cause more residents to “double up” and share an apartment or keep living with mom and dad a little longer, the problems in the single-family housing market are driving many homeowners back into the rental market. These are some of the best renters because they are “hunkering down” in their apartments and repairing their finances and credit and will not be buying a home anytime soon. In addition, since Laramar focuses primarily on B- and C- level “workforce” housing, we offer the more affordable alternative to newer Class A product and our assets perform very steadily in slower economic times. Also, from a macroeconomic perspective, the children of the Baby Boomers, the so called Echo Boomers, are entering their prime renting age over the next several years which bodes very well for apartments, especially at the B and C level.Laramar continues to find interesting value-add opportunities that are well located and meet our key investment metrics. Although improving market conditions certainly help with any asset’s performance, because the majority of the value that Laramar creates occurs through renovation and strategic repositioning, this value can be captured even in assets where occupancy and rent growth is relatively slow. For this reason, Laramar’s core value-add business plan can be successfully applied to assets facing a wide range of market conditions.MHN: Who are your toughest competitors for apartment investments? Woodward: There are a few other large companies that pursue a similar value-add strategy. However, many of these firms, even some of the larger ones, tend to focus on a few specific regions and do not pursue a true national strategy like Laramar does. In addition, many of these firms pursue less-extensive value-added opportunities, what we at Laramar call “around the edges” value-added deals. Laramar does a lot of deep renovations that require significant renovation and repositioning—”heavy lifting” in Laramar parlance. Laramar has developed an expertise over our 20 year track record of successfully capturing value in these deep value-add deals that few other companies have matched.The majority of the deals that Laramar does are “off-market” transactions and are not widely marketed by the brokerage community. We have developed relationships with property owners nationally. Our fund also allows us to close quickly when necessary in order to make the transaction work for a seller that may have a time constraint. Property owners that are considering selling have a high comfort level dealing with Laramar because they know that we understand the renovation business well and have a history of strong execution. This allows Laramar to uncover many direct deals that never hit the radar of the broader market. MHN: You have also purchased some “failed condo” deals. What is the upside on such deals and some of the challenges? Woodward: Laramar has purchased several “broken condo” deals over the last year, ranging from properties that are fully occupied, to partially emptied out, to 100 percent vacant. Each asset presents its own unique challenges. However, they all share some common issues that we have to tackle. First, we let the market know that the property is no longer going to be condos. This requires educating the existing residents (who may be running for the doors) as well as prospective residents. Laramar’s marketing team develops a comprehensive marketing and communication plan before taking over the asset in order to ensure that the market knows that the asset will remain a rental community. The next challenge is either finishing, or, in some cases, un-doing, the work that the former condo converter started. At some of the broken condo deals that we have taken over recently, the failed condo converter started emptying out units and gutting the apartments before they had any sales. These units now have to be “put back together” which, in some cases, require all new interior components (which plays right into Laramar’s renovation expertise). Then the asset’s occupancy and financial performance must be stabilized. This requires a lease-up of all vacant units. Since Laramar’s specialty is value-add, some of the broken condo deals we have targeted also require significant unit interior and common area upgrades. As you can imagine, there are a lot of moving parts which makes these investments very challenging but also very rewarding when executed properly.As with all real estate investing, the underlying asset needs to justify the investment and locations must be carefully scrutinized. However, given the condition of the condo markets in many areas of the country, we at Laramar see significant opportunities over the next couple of years to acquire, renovate, lease up and stabilize some outstanding assets that might not normally be available in a more stable period of the real estate cycle. To comment on the article, contact Keat Foong at