Multifamily Product Types

When talking about multifamily properties, there’s often a lot of jargon used. As an investor, it will be helpful to understand the general characteristics of the three multifamily product types, the four main investment strategies, and the three classes of multifamily real estate. While none of these definitions is absolute, they should help frame your understanding of an investment opportunity.

Product Types

Multifamily product is typically categorized as garden-style/low rise, mid-rise, and high-rise.

  1. Garden/Low Rise
    • 2-4 story walk up
    • Oftentimes repeated floor plans
    • Constructed of wood frame on top of concrete slab
    • Mostly suburban locations
    • Low density
    • Surface parking
  2. Mid-Rise
    • 5-8 stories with elevators and central halls for apartment access on each floor
    • Constructed of steel frame or reinforced concrete
    • Mostly urban locations
  3. High-Rise
    • Above 8 stories
    • Constructed of steel frame or reinforced concrete
    • Mostly urban locations
    • High density
    • Parking is likely at grade but below the first floor of the building (which may sit on a podium), in a full-fledged parking structure, or in a below-grade parking garage

Investment Strategies

Real estate investment opportunities vary across the risk/return spectrum, but generally fall into four categories, from lowest perceived risk to highest risk: Core, Core Plus, Value-Add, and Opportunistic. For these strategies, think of risk this way: it’s the possibility that future investment performance may deviate over time in a manner that is not entirely predictable at the time of the investment.

  1. Core

    A Core strategy has the lowest perceived risk/return profile. Core investors typically take a longer-term view of commercial real estate investing, use low leverage (30% to 50%), and value predictable cash flow. Income makes up a majority of the total return. Core multifamily is typically newer, high quality, stabilized assets in primary markets which trade at the lowest cap rates. The performance of Core is most influenced by market cycle timing and market fundamentals.

  2. Core-Plus

    A Core-Plus strategy has a moderate risk/return profile. Core-Plus investors use moderate leverage (55% to 70%), and they are drawn to the stable cash flow and value add component. An example of Core-Plus multifamily is a stabilized apartment community with below market rents in need of light renovations.

  3. Value-Add

    A Value-Add strategy has a somewhat more elevated risk/return profile than Core-Plus. Value-Add investors use 65% to 80% leverage, and they acquire under-performing assets with physical and/or operational deficiencies. Most value-add assets tend to be older. Value-add business plans usually involve curing deferred maintenance, upgrading the property and tenant base, improving management, and raising rents. These investments typically offer low initial yields while the property is being re-positioned, but once the business plan is executed, the increase in cash flow and appreciation can be significant.

  4. Opportunistic

    An Opportunistic strategy has the highest risk/return profile. Investors who acquire opportunistic investments tend to use moderate to high leverage. Examples includes ground-up development or a very comprehensive repositioning. These investments don’t offer yield in the early years, but once the plan is executed, offer investors significant yield and appreciation. These projects are typically the most complicated and require daily oversight.

Classes

There are three classes of real estate: Classes A, B and C. I’ve included a fourth (Class D), as you’ll sometimes hear it discussed in the industry.

  1. Class A
    • New construction or very high quality renovation
    • Prime location
    • High occupancy level
    • High end finishes and amenities
    • Attracts Core investors
  2. Class B
    • 1980s to 2005 vintage
    • Average to good location
    • Stabilized occupancy level
    • More limited amenities and basic unit finishes and fixtures compared to Class A
    • Minor to no deferred maintenance
    • Attracts Core-Plus and Value-Add investors
  3. Class C
    • 1970s to early 1980s vintage
    • Average to good location
    • Outdated or original finishes and fixtures
    • Some deferred maintenance
    • Attracts Core-Plus, Value-Add, and Opportunistic investors
  4. Class D
    • 1970s or earlier
    • Declining growth area
    • Outdated or original finishes and fixtures in need of replacement
    • Significant deferred maintenance
    • Management issues
    • Most investors usually pass these opportunities

 

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