As multifamily brokers, we consistently hear from buyers searching for value-add properties. However, increasingly, we are beginning to hear discouragement there are no more value-add deals to be found. The per unit prices in Tulsa and Oklahoma City are accelerating into all-time highs; currently they are in the low $60,000 per unit range. While this escalation of prices may seem discouraging at first, prospective buyers need to realize that there are still opportunities to be found.
There were only a handful of sales last year in Tulsa that fell below the $30,000 per unit mark. Two were properties in receivership, and the others were in some form of distress. The reality is there just isn’t the same supply of distressed properties as there was a few years ago. In fact, the resale of properties that had been distressed and subsequently turned around have undoubtably been a factor in the increased prices paid for multifamily property.
Are there opportunities out there for the multifamily investor seeking to add value to a property and ultimately increase their return? Absolutely, but it will require investors to look a little harder at deals and dig a little deeper into the fundamentals of the property to unlock the potential and increase the income. In this market, savvy investors are looking at all aspects of a property and its operation to uncover the opportunities in order to make deals work in this time of increased values and compressed cap rates.
Some recent examples of multifamily sales that have turned into value-add opportunities include the implementation of management improvements. By carefully controlling costs, and really studying rents in the submarket and increasing those rents, new owners have seen handsome returns.
Additionally, we are seeing opportunities spread across all neighborhood classes and property classes. Recent transactions in less than desirable submarkets have illustrated that an owner, armed with a solid plan to renovate and update its property can see significant rent gains and capture the best residents in an area. Conversely, there have been sales of properties in very desirable submarkets at hefty prices, yet the new owners are performing significant rehabs to reposition the properties even further. Rents in Tulsa have grown at a 2.2% clip in 2019, but with the appropriate upgrades some properties are achieving rent growth well beyond that.
Buyers may have to come into a deal at a CAP rate that might not make a lot of sense initially to ultimately get a return that is better than the market rate return. One thing is for certain, investors won’t see any return staying on the sidelines.