Class B Apartments in Demand

  • Monday, January 8, 2018


Investors Look to Capitalize on Workforce Housing Shortage


Apartment investors will be hunting for Class B properties this year - not as the value-added proposition they’ve been seen as recently, but as a way to address the shortage of workforce housing.

While many investors have scooped up Class B rentals in the last few years, the move was usually part of a value-added strategy to compete with the wave of luxury high-end rentals being developed. The idea was to find older, or suburban properties, spend thousands per unit to up the amenities and renovate the unit interiors to match those of the new projects, and capture similar rents.

Now, though, some major investors see value in Class B assets just as they are.

Morgan Properties, the multifamily investment shop based in King of Prussia, PA, acquired $1.2 billion of apartment properties last year, snapping up 18 Class B communities from Washington D.C. to New Jersey with more than 8,600 units. Market players expect the company could match that pace this year.


"Our space is Class B, workforce housing, the renter-by-necessity," says Jonathan Morgan, the firm’s president. "We think those fundamentals are as strong as ever. The wind is at our back."


Morgan will make modest improvements to the units, including improving the bathrooms, kitchens and some common areas, to help juice net operating income. But the idea is to enhance the resident experience and still greatly undercut rents at newer, downtown properties.


"This is more about yield, more about cash flow. This a macro play on workforce housing," says Andrew Zelman, vice president of investments for Atlanta-based Carroll Organization.


The Carroll Organization acquired apartment communities last year totaling $1.6 billion, including a 28-property, 8,500-unit portfolio the company teamed up with PGIM, of New York, to buy for about $1 billion at year-end. Carroll too, expects to be just as active in 2018.


Like Morgan, Carroll sees a need for workforce rentals in most markets, especially the Sunbelt where the company focuses. Those units - mid-priced, moderately amenitized - are likely to see stronger rent growth than the core, high-end properties in those same markets. Carroll may execute some modest improvements to the properties, but plans to achieve its yield goals through cash flow and re-sale after the company's typical five-to-seven year hold.


The enthusiasm for Class B product comes at a fraught time in the economic cycle. Investment sales of apartment communities have helped fuel the real estate recovery for the past eight years. But as construction has steadily added new, high-end supply, rent growth in many markets is slowing, and concessions to renters have risen. Many markets have reached their peak, and a slowdown nationwide is seen as nearly inevitable.


"Clearly we’re in the ninth inning," says Jonathan Morgan. "But we think it’s an 11-inning game."


Reforms to home mortgage lending and the economic downturn itself brought homeownership rates to historic lows in recent years. Those rates have ticked up, modestly, in the last year.


But as Zelman of the Carroll Organization pointed out, the rates remain at historic lows - just not as low as, say, three years ago.


"Homeownership is still out of reach for many people, especially to live in major employment centers," he says. "There is always going to be a need to rent, as opposed to buy. And we think multifamily is less susceptible to disruption than other asset classes, like retail."