Hi,
I am prepping for a real estate PE interview, and I am wondering what are the main ways to increase the value of different properties by each type (e.g. multifamily residential, office, industrial etc.)? In other words, how the GP can increase returns for its existing properties across property types?
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Simultaneously cut expenses and boost revenue.
Decrease expenses and increase rents.
Slap a lower cap rate on the NOI
But something more like 'out of the box' thinking rather than high-level basics, even though it's an interview for an intern position.
Adding amenities to capture higher rents is always an easy one. Identifying inefficiencies in operations, tenant mix, and building layout is going to be the next way to add value.
Looking at a hotel you want to make sure the service level (limited vs full service) and branding (flag vs boutique) is appropriate for the location.
Looking an office building you want to look at floor plate efficiency - can you reshuffle small tenants around to create big spaces that capture more rentable square feet and subsequently more rental income? Can you reshuffle to small tenants to open space for a large credit tenant? What does your building load like and can you bump it up on future leases? Parking is always an important conversation - can you increase your parking ratio and subsequent parking income by either building a garage or leasing stalls from a close by lot?
Tenancy is huge in retail. Do you have the right tenant mix to optimize the amount of traffic into your shopping center as a whole? Do you have an anchor tenant and do the small spaces compliment or detract from the anchor.Do you have any shadow anchors that you should consider while determining the best tenant mix for your center?
I don’t know enough about industrial or multifamily to give advice on those. The concepts laid out above aren’t super complex but I would also be very impressed if an intern applicant came into the office talking about that stuff. You should research these things on your own so nothing sounds memorized or rehearsed.
This is very useful, thanks!
Google Steve Croman for optimal methods of boosting value in rent regulated multi-family properties.
American Greed did an episode on him. Very interesting.
For those who don't feel like googling, the guy would buy rent regulated properties. For these properties, rent couldn't be increased to market rates unless the tenant vacated. So after buying he would force/pay the tenants to move out and then bump up the rents, sell/refi with a higher NOI, then repeat. He made a large amount of money in a very short amount of time.
Rent control encourages slumlord behavior. Not a surprise.
A buddy of mine in a NYC rent regulated apartment couldn't get anything fixed in his apartment to save his life. Any time anything broke, it would go unfixed for weeks, if not months. The landlord wanted him and his roommates gone so they could up the rents.
Croman’s units (9300 Realty) are actually great if you’re a market-rate tenant. They’re usually the nicest pre-war product downtown, and that’s the big draw: much of his 117 building portfolio is in the most desirable areas (Nolita, East Village, West Village). He got many of the 30+ unit buildings for ~$1mm each in the late 1990s.
Build nice stuff to charge more rent. Amenities for MF, handshaped italian stone for your commercial buildings.
Increase value of the property or increase value of the equity/ownership stake?
Increase value of the equity to be more precise
blend and extend the lease before you exit (even if it means reducing rent and keeping it flat, providing concessions)
I’ll give you a real answer OP, I started off as an appraiser so I have experience with each property type and what specifically drives value.
Multi family - traditional value add strategies for MF include updating and replacing finishes such as counters, floors, bathrooms and even exteriors to give it a new brand/look. Opportunities to add new revenue streams can be particular valuable such as adding common laundry services, a small gym or even parking to unlock hidden value.
Office - the property type I can speak to the least but the big trend from what we have seen is adding more common amenities and driving towards more of a cohesive experiential experience for tenants. Upgrading lobbies, courtyards, adding a gym or enhancing outdoor areas increase curb appeal and marketability while being a fixed cost you spread over all your tenants.
Hotels - go through my post history as I’ve written a very detailed breakdown on how to add value to hospitality but at the end of the day otels are an operational business so the most value will be unlocked by closely watching and eliminating any unnecessary operating costs.
Industrial - most of the value in industrial building is derived from its proximity to a major highway or port (given the logistical benefit), your clear height (how high the ceilings are aka how many boxes can you stack/what equipment a tenant can house) and the number of drive up/drive in doors. We have seen recent success with partners building spec laboratory and higher end office space but the office space can actually lower value to a traditional industrial user if it is too much of the total space (15%+ is pushing it).
Retail - there’s been a big correction recently from a glut of big box space which was overbuilt through the 1980’s/1990’s. This space has several subtypes including grocery anchored, big box, single NNN tenant so there are subtleties but the broad trend in retail right now is smaller footprints for tenants but a more experiential settingfor shoppers. Restaurants, services and food all are not (at this point) cannibalized by online shopping so that’s where everyone is focusing.
Two important qualifications here:
There are subtleties even within each property type, for example industrial there is warehouse versus R&D space. Warehouse wants maximum clear heights, less office space and a lot of drive in/up doors while R&D users are happy with more and nicer office fit outs and have smaller footprints. You will find these distinctions/differences in all property types and need to understand them when investing or more importantly developing.
Strategy matters - there will be different approaches depending on what strategy the company implements and if they are going for core, value add or opportunistic returns. Broadly core will have more minor changes while opportunisti is often construction or big vacancies to fill. That will change the company’s approach.
In summary, I highly recommend you understand both the property type and strategy the company you are interviewing at implements. That will help you understand how they approach projects and specifically how you and your experience can add value to their organization.
Adding coin-fed common laundry to a property is a great way to really emphasize its Class C status
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