When I say "classic", I am referring to the narrative of rehabbing unit interiors (upgraded kitchens, baths, plan flooring, etc), refurbished leasing office, resort style pool furniture, new fitness center, dog park, blah blah. We have all seen the broker packages highlighting just how much rental premium exists if this strategy is pursued.
In speaking with a few of the major players on the West Coast who focus on this strategy, the feedback seems to be that buying 70s or 80s vintage and doing the major value add doesn't make sense given the relative returns. What we used to be able to underwrite to a high teens LIRR, now we are seeing in the 13-15% range. Lack of product combined with too much capital chasing deals. We've all heard the narrative. Starting to see core plus money chasing those 13-15% deals as well.
That all being said, is the better risk adjusted strategy to buy core-plus, i.e. good locations, deals that are 10-20 years old, could use a refresh but not the full kitchen sink? It seems like the whole workforce housing strategy of buying property that is proximate to major job centers but cheaper and upgrading it to more of a "grey collar" demographic is fairly played out as well.
I think most markets are topping out (except Houston) on a $ psf rent basis, and this means even Class C assets are seeing natural uplift in rent levels. Further accelerating the situation is landlord value expectations, and the bid ask spread. It all comes down to your basis right? Can deals still be acquired at an attractive cost basis, that gives one enough "room" to price in the necessary CapEx in a very high construction cost environment? I would think that's incredibly challenging right now. I would agree that rehab risk to that extent makes 13-15% a hard pass.
cpgame, What makes you believe that Houston has room to grow vs other metros in Texas?
Two Words: Hurricane Harvey
Exactly; and O&G prices have essentially hit the reset button over the past couple of years. Moderate to negative job growth typically results in fewer homes needed. Of all the SW markets, Houston is the one that in our opinion warrants a merchant build strategy given where valuations and rents are at as compared to historical trendlines.
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