Multi-Family Value Add Overheated?

I'm currently applying/interviewing for companies in the multifamily sector. Seems like the companies that do value add are a dime a dozen.

I would imagine that many of the OMs for these types of properties have Pro-formas with the "added value" already baked into the offering price. Was curious of what people were seeing out there.

Comments (5)

Mar 6, 2019

Depends. "Value add" is so generic that every firm is going to claim they do it. Otherwise how do you justify buying a property? By it's very definition, except in end-buyer cases like life insurance/mutual funds/whatever, any developer buying a property or portfolio is engaging in value add.

4 years ago there were tons of "value add" developers in NYC, specifically the Bronx, who were just going in and cutting expenses to the bone in the expectation of selling the property in a couple years with a higher NOI. Those people obviously aren't adding any value. If the firm you're looking at has a plan to capture value they'll be able to explain that pretty succinctly.

Mar 6, 2019

Yes, value/add is "over". When the rents on your "shitbox 1920's deal that looks like shit on the outside but has granite countertops inside" are $1 under the brand new high rise right next door... something is going to give.

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Mar 6, 2019

I work in the Value Add space and it is indeed overheated. Demand for this product and crazy pricing is causing returns on many deals to approach 13% deal level IRRs in good locations. At that point, you might as well target core plus deals.

Another challenge is that there is no physical value add left. Everything has been renovated. Buyers are now underwriting replacing stainless steel appliances with slate, or granite counters with quartz.

These are 70s deals and people are underwriting high rents with luxury interior finishes. It won't last. I'm currently trying to get out.

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Mar 6, 2019

I agree with deals being overbid constantly. Tough to win deals that pencil with prudent underwriting. I don't agree that there's nothing left though for workforce value-add. Literally opportunities everywhere, just tough to get them at the right price.

Mar 6, 2019

Robert Clayton Dean: What is happening?
Brill: I blew up the building.
Robert Clayton Dean: Why?
Brill: Because you made a phone call.