Phoenix has been ripe with value-add opportunities for multifamily investors this cycle. And while the market still has some meat left on the bone, especially relative to other major U.S. metros, rehab projects are slowing so far in 2018.
On average, more than 2,500 units were renovated annually from 2012 to 2017. This year, fewer than 400 units received renovations through mid-September. About 1,850 units are currently under renovation and about 60 percent of those are expected to deliver by the end of this year.
On a national level, value-add investing has been a popular play in the multifamily sector this cycle. This type of investor typically targets aging assets with below-market rents in submarkets with strong demand. After acquiring the property, the new owner implements a plan for capital improvements, which often begins with renovating unit interiors. After renovations are complete, the owner can justify substantial rent increases and command a higher resale price.
The 4-Star, 254-unit Pavilions on Central in the up-and-coming Midtown neighborhood exemplifies this trend. The property was built in 2000 and was acquired by Dallas-based Crow Holdings in 2013 for $46.9 million, or about $185,000 per unit. From 2013 to 2016, Crow Holdings upgraded all unit interiors except for the bathrooms. Rents grew by roughly 30 percent during this time.
In May of this year, Seattle-based Security Properties purchased Pavilions on Central for $59 million, or about $232,000 per unit. The buyer plans to implement an additional light value-add plan by upgrading all bathrooms to high-spec to match previous ownership’s kitchen upgrades. The plan will also include repainting of the exterior, a new state-of-the-art fitness center and a game room addition.
Another recently traded asset that received a big boost in rent growth following renovations is the Class B, 352-unit Paradise Vista apartments in the West Valley submarket. Since renovations were completed in 2015, rents have grown by roughly 20 percent, outpacing the metro average by about 500 basis points. Connexion Asset Group purchased Paradise Vista in 2014 for $7 million, or nearly $20,000 per unit, and after the rehab plan was executed, sold for $14 million, or $40,000 per unit, in 2016. In January of this year, it traded for $17 million, about $48,000 per unit.
The West Valley submarket has one of the highest concentrations of pre-2000 product in the metro, making this a prime area for value-add plays.
Phoenix is likely to remain in the sights of value-add investors as opportunities thin in many major U.S markets. Even with elevated construction levels since the turn of the century, close to 70 percent of inventory, or about 203,000 units, were built pre-2000. Of those properties, about 34,000, or nearly 17 percent received renovations after 2000.
By Mike Petrivelli