SAN DIEGO—There is a significant difference between what a new apartment project costs to build or buy today and the pricing on 1970s and 1980s vintage projects, which can typically be acquired for well below replacement costs, Pathfinder Partners LLC’s senior managing director Lorne Polger tells GlobeSt.com. As we recently reported, the San Diego-based firm specializing in opportunistic real estate investments has acquired two Phoenix-area multifamily communities totaling 300 units for a combined total of $34.1 million. Polger said the acquisitions, both build in the 1980s, represent value-add opportunities, with room for rent growth.
We spoke exclusively with Polger about the apartment-building boom of the ’70s and ’80s, the appeal of those value-add multifamily properties and what to look for when acquiring these types of communities.
GlobeSt.com: A number of multifamily properties were built in the ’70s and ’80s. Why are these an attractive investment now?
Polger: There is a significant disconnect on the price that a new apartment costs today to build (typically in the range of $250,000 per door or more given the rapid increase in construction, land and entitlement costs) or buy (even higher, once stabilized) and the pricing for 1970s and 1980s vintage projects, which can typically be acquired for well below replacement cost. Given the high cost to build new product, the corresponding rental rates are also significantly higher (in some cases, double or even triple those being charged for older product). Our current investment thesis is that as a direct result of this dichotomy, there is much more room for measurable rent growth with the older properties, especially after they are improved and modern amenities are added. More rent growth equals a greater return on our investments.
GlobeSt.com: What do you look for when acquiring these types of properties?
Polger: The properties need to have good bones and be well located in strong submarkets. By the term “good bones,” I mean that they need to have solid physical fundamentals, good floor plans and unit mixes, right sized units and common areas that are easily adaptable to change and enhancement. We have developed templates for our improvements to unit interiors and common areas, and the properties need to match up with those templates. As to submarkets, we get very granular with how we look at properties. If the submarket is not trending positively with economic growth, urbanization and walkability (i.e., things that will attract tenants over the long term), then it’s not something we will chase.
GlobeSt.com: Are there any markets that have a surplus of these types of properties and any markets that are especially attractive?
Polger: These types of properties are found in all of the markets that we have been active in over the last few years: San Diego, Los Angeles, Seattle, Portland, Phoenix, Denver and Las Vegas. Markets like Phoenix have been more heavily traded through the cycle, while markets like San Diego have been thinly traded. But because there was an apartment-building boom throughout the West during those years, all those markets have product that fits the criteria. The challenge has been to be a prudent, patient buyer and pick the right projects at the right prices.
GlobeSt.com: In this era of high-rise, luxury towers, how do the older apartments fill a void and how can they compete?
Polger: Traditional garden-style apartments are less dense and often have a more spacious feel, with mature landscaping and open gathering areas. There is a demographic of tenant, including families and older renters, that appreciate this type of community over the more modern, dense luxury tower—and with rents soaring, they provide an affordable alternative.
GlobeSt.com: How do you add value to these properties?
Polger: We have used a dual-prong approach to value-add renovations, both focused on areas where people gather in their units and in the project common areas. In the kitchens, we have typically added quartz countertops, stainless-steel appliances, glass-tile backsplashes, modern sinks and tap sets and enhanced lighting. At times we will do a full cabinet replacement; at times, we will only replace the cabinet doors and sometimes just the cabinet pulls. We have done similar enhancements to bathroom areas and have generally added hard-surface flooring in the living rooms and kitchens. We generally work with different architects and interior designers to come up with a palette that is customized depending on the city that we are working in. As to common areas, it’s all about adding and enhancing gathering places. That can include dog parks, better gyms and pool areas, coffee bars and community kitchenettes, business centers and clubhouses.
Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What’s driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.
Carrie Rossenfeld › Carrie Rossenfeld is a reporter for the West Coast region of GlobeSt.com and Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
L5 Real Estate Investments, LLC is a privately held investment firm focused on stable, income producing multi-family opportunities in emerging U.S. markets.