In December 2018, my company bought a multifamily property in Oak Ridge, Tennessee, that consisted of 130 units spread out over 18 buildings. Built in 1987, the place wasn’t too old. It was, however, rather tired-looking. We sought to awaken it, sprucing up the interior and exterior while adding a clubhouse and fitness center, as well as an outdoor playground, fire pit and grilling area. Long story short, we reopened the place as a Class A property in the summer of 2019, and as of September were operating at 100% capacity.
That is only one of our recent repositioning efforts. We consider a deal every week, but close between three and five a year — a little less than 10%, maximum, every 12 months. There are that many I’s to dot and T’s to cross. There is that much competition out there.
So, you keep plugging.
Repositioning is hardly exclusive to the multifamily space. Just outside Los Angeles, a 380,000-square-foot warehouse was converted from a postal distribution center into a commercial complex. On Long Island, a hulking structure that once served as the training facility for the NFL’s New York Jets was transformed into a medical college. And in Chicago the iconic Willis Tower underwent an extensive makeover.
As a licensed Illinois real estate broker since 1979, I follow these stories with great interest, well aware that such projects have been part of a decade-long trend toward repositioning fueled by changing real estate markets and other economic factors. As Richard Brennan, an architect and partner at the multidisciplinary design practice HLW International, told marketsmedia.com, “By expanding traditional ideas about rehabilitating and retrofitting commercial properties to include building use, it is possible to create value where previously there wasn’t any.” Transforming a building from its original use to a new one makes it appealing to a wider variety of potential tenants. Which, of course, is also true in the multifamily space.
Here are some tips for determining when to reposition a property, and how to achieve the greatest results from this strategy.
Know Whether It Will Grow
When determining where to buy a property, one of the main things to consider is an area’s population/job growth. One of our repositioned properties, for instance, is a half-hour west of Knoxville, one of the nation’s fastest-growing cities. Pick a property in a region that continues to add jobs and is projected to continue on that growth trajectory for the years ahead.
Ratings Bonanza
Once you’ve identified a desirable submarket and unearthed an asset within it, the next step is determining the rental rates in that area. This can be done by doing a competitive market-rate survey. Analyze the average monthly rents for one- and two-bedroom units, as well as year-over-year increases.
Get Boots On The Ground
There is no better way to get a sense of a place than by doing a physical tour of a property. That’s how you can best determine the general condition, the neighborhood, what amenities need to be upgraded (and to what degree), etc.
While I am far from a Luddite, I have always preferred making notations on a yellow pad, as opposed to depending on an electronic device. You might be more inclined toward your gadgetry, which is fine. The point is that the requisite legwork is completed and that you gain a full understanding of the task ahead.
Send In The Troops
Throughout your renovation period, someone should travel from your office to the property at least once every 30 days or so. At the same time, be sure to communicate daily with your on-site manager, leasing agent and maintenance personnel, which will enable you to track progress in real time. Always be heavily involved in the repositioning process, despite the distance involved.
It’s All In The Amenities
Every multifamily owner is looking to appeal to millennials, and with good reason: They are the United States’ largest age cohort, numbering over 70 million as of 2018. And because they came of age in the recession of 2007-09 (and have been hit hard by student debt), they are more likely to rent than own their own homes.
As a result, it pays for apartment owners to tailor amenities to this age group. Members tend to want easy access to work, entertainment and outdoor activities, meaning that as always, real estate is about location, location, location. Short of being within easy reach of such things, multifamily owners would do well to at least provide information about the best way to access them, while also featuring things like inviting kitchens (since millennials love to socialize) and green technology (since they are environmentally conscious).
The bottom line is that repositioning holds many challenges for a real estate professional, while also holding great promise. It’s a matter of trusting in a methodical, logical process.