While value-add has long been seen as a lucrative asset class in multifamily real estate, in today’s economic climate, savvy investment managers are shifting their focus to core-plus opportunities. Ashley Socarras, EVP of investments for Lloyd Jones, offers her perspective on why Lloyd Jones believes core-plus is an ideal investment for this economic cycle and what to look for in a real estate investment partner when considering this type of investment.
What is core plus? How does it differ from value-add?
Core-plus asset investors can typically increase cash flow through light property improvements, management efficiencies, or by increasing the quality of the tenants. These properties tend to be of high quality and well-occupied. In contrast, a typical value-add property tends to have a higher vacancy rate and some amount of deferred maintenance that must be addressed.
Are you seeing a shift in focus from a value-add to core-plus investment strategy? Why?
Value-add will always be a highly desired strategy, and we still believe in value-add under the right conditions, but competition and pricing for these types of assets has risen significantly. The risk profile of value-add has increased as well, compressing returns. Greater construction costs and upgrade expenses are also contributing factors, causing investment managers like Lloyd Jones to look more closely at asset types like core-plus multifamily.
As an example, we’re currently assessing a multifamily deal in a major South Florida city that was built in 2010. While there are several newer communities in the submarket, we’re optimistic that our enhancement strategy will bring it up to market standards to compete with the newer assets and drive a rent premium of several hundred dollars per month.
How does Lloyd Jones improve the value of the core-plus asset throughout the investment period?
Our investment team works with our in-house asset management team to determine the best business plan appropriate for the asset, location, and demographics that we are targeting. We complete a financial and market analysis, evaluate the physical condition of the property and the upside potential of the opportunity to determine which strategy will have the highest level of return in proportion to the total invested capital, including any upgrade costs. Once acquired, our multifamily management division, which manages the asset, will uncover operational efficiencies and further maximize revenue.
This strategy is underway at one of our recent acquisitions, Grandewood Pointe, which was built in 2005. Our business plan involves upgrading the units with high-end finishes like tile backsplashes and quartz countertops in the kitchen, new hardware and framed mirrors in the bathrooms, and a smart home package that includes a Nest thermostat. These upgrades were what our team’s analysis determined would net the best value for our investors. Since acquiring Grandewood Pointe, our property management team has improved operations and maintained its occupancy, leading to income growth.
What advice would you give to investors considering adding core-plus properties to their portfolio?
Investors interested in core-plus should select investment partners who closely follow market trends and do extensive analysis to determine the best strategy and which improvements are best suited for the asset and its location to net the highest returns. Value-add communities will always be a popular high-demand strategy, but the timing of the market is showing that the risk profile between core-plus and value-add is virtually the same.
Ashley Socarras, EVP of investments for Lloyd Jones, has a strong background in the real estate and banking industries. She joined Lloyd Jones in 2016, and throughout her tenure, she has played a critical role in the acquisition/disposition of approximately 4,000 multifamily units across the Southeast, valued at over half a billion dollars.