National Real Estate Investor's Bendix Anderson looks at the uptick in value-add development, as acquisition–rehabs proliferate at this point in the market cycle.

As the cost of building new communities continues to climb, particularly in urban areas, more developers are taking the opportunity to turn around an older asset to find a decent yield.

“A lot of people are coming back downtown,” says Kevin Thompson, of Bell Partners, a value-added developer based in Greensboro, N.C. “That drives the ability to do value-added redevelopment—there are phenomenal pieces of older real estate, and everything around you might be new.”

Developers like Bell and Waterton are doing well by rehabbing Class B properties into Class B+, as fundamentals in that sector outpace those of Class A assets.

“We think the rents at class-B properties will certainly outperform class-A rents,” says Richard Hurd, Waterton’s chief investment officer. “We are certainly focused on well-located workforce housing.”

... Many of the properties Waterton buys are less than fully occupied. Typically, the percentage of occupied apartments is in the 80 percent range. Value-added developers usually spend about $10,000 to $15,000 per apartment to upgrade a property.

“There is about a 20 percent internal rate of return on that investment,” says Hurd. “Our minimum return is 15 percent.”

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