Time to Step Up the Value-Add Game

Robert Cohen of Hudson Capital Properties touches on the challenges and opportunities in the multifamily sector. He also highlights why consolidation is the company's key short-term goal.
Robert Cohen, executive vice president, Hudson Capital Properties
Robert Cohen, executive vice president, Hudson Capital Properties

Market fundamentals are supporting sustained multifamily investment at lower cap rates than initially anticipated. At the same time, value-add strategies, while still a major trend, require more resources than before, due to changes in residents’ needs and high competition with foreign capital. These are just a few of the insights provided by Robert Cohen, executive vice president for Hudson Capital Properties, in an interview with Multi-Housing News.

Cohen also reflected on how technology is shaping the industry and why new supply volumes are no reason for concern.

How did the multifamily market play out so far in 2018 compared to what you were anticipating?

Cohen: The market this year has diverged from our initial expectations in a couple of different ways. We’ve seen a larger influx of new Class AA properties come online in some of our target markets. This new supply is being absorbed, but rent growth has been tempered. On the investment side, global events have caused somewhat of a flight to safety, mainly to U.S. Treasuries. This, in turn, has kept multifamily fixed-rate agency debt rates in the 4 percent range allowing for sustained multifamily acquisition activity at historically low cap rates, where we might otherwise have expected cap rates to rise this year.

What are some of the challenges in the multifamily investment landscape?

Cohen: The biggest issue for us as cash flow-oriented multifamily investors is the narrow spread between cap rates and the cost of debt capital, which has caused us to adjust our expectations to some degree. There is still upside to be found, but we believe that our value creation efforts will need to be enhanced in order to achieve the desired yields. Otherwise, the biggest issue is the influx of new supply in hot markets and the extremely competitive landscape created by capital from all over the world seeking U.S. multifamily transactions.

How has the value-add process changed in the past years, considering residents’ needs?

Cohen: Earlier in the cycle, as an investor, you could spend less per unit on renovations and still hit the returns you wanted. Many investors were living off of very light value-add and asset appreciation. Those days are gone for this cycle, and you have to spend more and work harder to provide top class amenities and improved interiors—more than a coat of paint, in other words.

What role does technology play in the process of maximizing an asset’s value?

Cohen: There are several areas in which technology plays a major role in multifamily investment management and asset management today. At the corporate and asset levels, software can make a huge difference. Examples would be rent optimization software at the asset level and portfolio management software like Yardi at the corporate level.

On the user side, we’re finding that tenants across multiple demographics are looking for in-home technology packages including features like Nest for climate control, electronic door operations for security, and Alexa installed with Bluetooth speakers.

Do you expect this fast-paced development activity to continue? What are your market predictions for the future?

Cohen: The deliveries of new Class A product, which are at an all-time high for this cycle in many of our target markets, will taper off over time with debt for new development becoming more difficult to secure. Supply will tighten, concessions will burn off and rent growth will return slowly.

Hudson Capital Properties targets primary markets in the Southeast and the Midwest. Is the company considering entering new markets, in or outside these region, and what would those markets be?

Cohen: At the moment, we’re seeking to build critical mass in our existing target markets in order support the creation of local, in-house management. Given this approach, we’re not actively looking to invest in new markets, but will consider compelling opportunities within states where we already operate.

Tell us about Hudson’s plans going forward.

Cohen: The long-term goal is to build a multigenerational family real estate investment and management platform. We’d like to own 25,000 units within our current markets by 2020.

Image courtesy of Hudson Capital Properties