Value Add: Evergreen Strategy

Jun 30, 2021 | Investment Insights, Multi-Family Advice

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In the last quarter, we closed on the sale of two of our San Antonio assets. They were both 1980’s vintage apartments where we executed a pretty deep value-add renovation.  We converted old and unused tennis courts to new amenities, updated leasing centers, rebranded both assets and renovated apartment unit interiors. They were pretty classic examples of what you think about when you hear someone talking about a “value-add strategy”. 

Two weeks ago we closed on an asset built in 2008, and we very much view this property also as a value add play.  The property has been poorly run by an absentee owner, it had a bad reputation online and has not been given any love since it was built.  The unit interiors have never been touched, and didn’t wow anyone even then–which means they are coming up on 15 years old and feeling dated and tired. Overall, this deal screams value-add multifamily to us.

When most people use that term and say they are looking for value-add deals they seem to be talking about 1980’s, and even 1970’s vintage assets.  At Wildhorn, we have a bit broader view when it comes to value add, and we think it’s an evergreen strategy. 

When I sit back and reflect on the last 3 months, we’ve upgraded our portfolio and lowered the average age of the assets we manage.  We sold two 1980’s deals and bought a 2008 deal.  All of this in the San Antonio metro. Yet we continue to operate a predominantly value-add multifamily company and portfolio. Our strategy isn’t changing, and we don’t think it ever will. Value add projects allow us to create the most value for our investors, and they create a positive impact in the communities we operate.  Providing residents with quality, modernized places to live is never going to go out of fashion, and we think the demand will always be there for upgraded apartments.  It’s a true win-win. 

As this update in our portfolio has occurred, it has gotten us really excited about the future.  We’ve always felt value-add was broader than just 1980’s products, and this has proven that out.  We actually think the value-add strategy is evergreen–that as apartments age, they need love, attention and upgrading.  Apartments built in the year 2000 are now 20 years old. Apartments built in 2010 are over 10 years old.  In 2040, the apartments being built today will be 20 years old. In each scenario, to compete with the newer products being built at the time, those assets will be ready for a value add plan. 

We intend to be in this business forever.  I’ve got no plans for retirement–I’m having too much fun.  And thinking about the deals we might be buying in 2050, and knowing there will be value-add opportunities then just as there are now, is really exciting. 

Beyond the pure excitement factor, there are some real tangible benefits to buying these newer properties, and it’s part of the reason we’re shifting our focus to seeking out the 2000’s vintage assets. 

Inherently, a building that is 20 years old is likely to be in better shape than a building that is 40 years old.  The systems and components that comprise that complex are just newer, and should be in better shape.  That removes risk off the deal as there is less likely to be unknown or unexpected issues (read: costs) that pop up. 

The newer buildings are also just built better, and to a standard that is more appealing to today’s renter.  This is most obvious when talking about ceiling heights.  Most 1980’s built apartments have 8’ ceilings, whereas construction methods changed and everything built in the 1990’s and later has 9’ and taller ceilings.  So if we’re buying a 2008-built product with a plan to upgrade it and compete with newer apartments, we’re starting with a much more similar product. It’s tough for 8’ ceilings to ever feel as nice as 9’ ceilings, no matter what sort of upgrades we’ve put in the units. 

You also see most newer built assets have washer and dryer connections in the unit.  In our portfolio, we’ve seen a clear preference to have laundry facilities in your unit vs having a shared laundry room.  Many of the older deals just weren’t built that way, and while many complexes have been retrofit over the years to accommodate washers and dryers, they can feel a little clunky or are located outside off the patio .  We think it’s a competitive advantage to have full size washers and dryers in the units and most everything built from 2000 and on will have those. 

The list goes on and on for reasons we are transitioning to 2000’s and newer value add products.  As for the future and the evergreen aspect?  We know as apartments age, they will be behind the newly built communities in some respects. When you think about technology and what is being put into apartments today, there are things available today that clearly didn’t exist 15-20 years ago.  That will be the case 15-20 from now as well.  A 2021-built property will be behind a 2041-built property.  

Tastes will change, color palettes will evolve.  Technology we can’t even dream of will be present in every unit.  We’ll be looking for ways to update today’s properties to compete with the apartment of the future. 

For today, we’re excited to keep looking for the 2000’s built projects where we can bring new life, upgrade the asset and continue to create a win-win for our residents and our investors.