I was fortunate enough to attend the National Multifamily Housing Council Conference in San Diego again last month and was able to reconnect with old friends and meet many new industry peers. Between hustling around the hotel from meeting to meeting, I had time to sit in on some of the conference panels covering various topics pertinent to multifamily. Industry titans gave opinions on the state of the economy, building trends, and interest rates.
One consistent topic was that value add deals are going to offer some of the best returns in 2017 as overbuilt core markets cool off. That of course was music to my ears since I’m in construction and renovations. CRG builds in tertiary markets and executes heavy value add renovations on existing assets. The positive outlook on value add projects left me feeling very optimistic.
Later that evening, I had dinner with a client friend and the owner of a successful development group. We were enjoying our dinner and drinks when I asked Tom, “Do you think you will ever do a value add deal again?” What happened next was shocking. Tom put his fork down, looked me in the eye and said “There is no such thing as value add”. I almost spit out my drink. What?! Who would say such a thing, he was joking right? No, he was very serious.
This long story brings me to his explanation that got me thinking very hard about what I know or don’t know about multifamily. He went on to tell me that all the “value” in value add comes directly from Beta. It’s not generated by the Alpha side of the equation. No one can truly add value of any significance to an apartment without Beta. For those who are unfamiliar with the terms, very simply put, Alpha is the deal maker’s side of a transaction: experience, buying right, maximizing ROI on renovations, etc. Beta are the market’s forces out of our control.
Tom went on to explain that all of the gains from value add the past many years are from, and will continue to be from, the surging rental markets. Without that, no amount of upgrades or fancy financing would have generated a return. His thought process is why risk trying to time market forces when he can just build new.
Well that is a lot to take in and I will tell you I still believe in value add, but I hope this story invokes reflection from all of us as to what we know and don’t know about the multifamily business. Maybe, despite our best efforts, sometimes we are just along for the ride.