Class B and C Apartments Will Rule In 2018
I believe it’s time for class A apartments to make way for B and C as investors are quickly switching to better value.
The multifamily market is seeing a move toward better value assets across the country. Class A communities have seen a drop in demand from investors and end users alike due to a combination of a few factors; the rising cost of homeownership, and millennials entering the market by the millions. Foreign investors have begun to adjust their investments as they feel there are better returns in the B and C asset classes.
We are finding we have more than enough inventory of class A assets. Older properties have proven themselves to be more or less recession-proof, whereas newer properties can easily become a liability under the same economic conditions due to higher rental rates and expenses due to additional amenities.
Class A assets are usually located in prime communities therefore demanding higher rents than their counterparts, but if demand should slip and vacancies go up, the NOI will go down. Also, renters start getting priced out in a changing economy, so investors will find returns with class B and C assets will increase as they are hit less in a down economy.
The costs for construction have also seen an upward shift over the last few years so building class A assets has also become a bit of an issue. They usually come with a higher tax bill as well. According to the Wall Street Journal Class A construction is at a 7 year peak so we may run into an oversupply shortly.
Class B and C properties are attracting a wide demographic, from working-class individuals to millennials entering the market to downsizing baby boomers. They tend to offer residents the most bang for their buck, and are attractive to more renters in a down economy. The typical Class B/C properties are around 15 to 25 years of age, and are located in desirable buildings in well-established middle-income neighborhoods.
Class B and C properties also allow real estate investors opportunities to enjoy a significant lift in NOI by making small property improvements. Examples of these value-adds include putting in communal clubhouses, adding dog parks, laundry facilities in the unit, and offering community events. These upgrades to B and C apartments can be relatively inexpensive to implement, yet can generate higher rents, leading to rapid ROI growth.
Homeownership is gradually becoming less of the norm and more of a luxury. Prices reached record highs in many areas in 2017, resale inventory is low, and new homes in affordable cost brackets are in shorter supply. The number of millennials reaching the prime renting ages of 20 to 34 will increase by 2 million in 2017 and surpass 70 million within the next seven years, according to Yardi Matrix, making this the target demographic for multifamily real estate properties, especially since millennials are renting longer than historically any other generation has before.
The need for affordable housing will continue to grow and drive the need for Class B and C properties forward at a quick pace… with this demand brings opportunity, so don’t miss out!