“It’s always been tough to secure value-added apartment deals,” says Laramar, president Jeff Elowe. “We founded this company on that strategy, so that’s all we really do in the apartment market.”
Despite extremely low yields for value-added apartment deals —Real Capital Analytics pegged the average yield at less than 6% as of the end of November — Elowe isn’t too concerned about overpaying for weak properties. His reasoning: “It’s ultimately the value that you can add to the property. The going-in cap rate really doesn’t tell that story.”
Most investors define value-added assets as those with extensive vacancy or in need of a major renovation. Properties located in secondary or tertiary markets also get lumped into the category, though intense capital flows have blurred the boundaries between these markets.
The Laramar fund has already bought four large apartment complexes: Manchester Oaks, a 198-unit apartment community in Palatine, Ill., an infill northwestern suburb of Chicago; the Promenade at Berkeley, a 492-unit apartment community in Duluth, Ga.; Parkway Towers, a 302-unit mid-rise community in Harwood Heights, Ill., an inner-ring suburb of Chicago; and the Park Baldwin Palms, a 436-unit apartment community in Orlando, Fla.
Laramar will extensively upgrade all four apartment complexes, though some units need less work than others. One major work in progress is the Manchester Oaks property. At the time it was acquired by Laramar, the property was 60% vacant in a submarket whose average apartment vacancy rate is only 5%. The rents at the Manchester Oaks property are also 20% below average for that market.
Laramar plans to renovate and reposition the property with the addition of a clubhouse and leasing facility, a movie theater, fitness center and an Internet Café. New exterior building finishes including pitched roofs, landscaping and new signs and lighting, will also be added. Unlike some private buyers who throw as much as 85% leverage or more into their value-added apartment deals, Elowe of Laramar won’t seek financing more than 75% of any given deal. His typical hold period is roughly four years on average, too.
“You have plenty of private money looking to do these value-added deals,” says Jeffrey Cooper, senior managing director at Manhattan-based investment sales brokerage Granite Partners. “When it’s so expensive to build anything, you see more people willing to spend money on a renovation rather than a ground-up development.”
In October, for example, Cooper represented the seller of a 19-building, 983-unit housing complex in Brooklyn. A joint venture between Taconic Investment Partners and Apollo Real Estate Advisors spent $90 million to acquire the complex. But they will also spend another $40 million to upgrade the complex and attempt to sell many of the units to current residents. Cooper says that the new owners will ultimately spend around $91,500 per unit to refurbish the entire complex.
“Buying properties outside of major markets like Manhattan [in the outer Boroughs] is also a classic value-added strategy,” adds Cooper. “There are many ways to create value in an apartment deal.”