1. Tenant Pool Stability
On the apartment quality scale of A—B—C—D, owning A-class assets is not all it’s cracked up to be. In an economy of fluctuating incomes and employment, with underemployment as a growing trend, holding owning B- and C-class assets is the most enviable position because these asset classes benefit most from ‘downward mobility’ pressure being exerted on the tenant base. Former A-class tenants are not going down to D-class units. Rather, they are settling for B-class apartments. Similarly, former B-class tenants are settling for C-class apartments. Given that D-class properties are uniformly crime-ridden and unsafe, the bulk of the pre-existing C-class tenants will strive to remain in a C-class property, spending more on housing than the average tenant by sacrificing elsewhere.
2. Non-Speculative Market Space
There is one very important question to answer when contemplating the development or purchase of an A-class apartment asset—Is there a large enough pool of viable tenants with the economic means and the appetite to live in the most expensive, albeit most richly appointed, apartment property in the area? While the most expensive product on the market carries distinction and prestige, these features do not necessarily lead to greater sales. In our unpredictable economic climate, we can emphatically affirm that these assets do not typically produce meaningful financial returns for investors.The most important question to ask regarding prospective B or C class asset is this: Does the property have the right problems? That is, does the property have:
- Deferred maintenance, and/or
- Poor management
Deferred maintenance and poor management are quickly remedied by the application of intelligent and aggressive property management fundamentals. Commanding property management focused on correcting physical deficiencies, improving tenant quality, and introducing tenant-centric services produces momentous returns on investment.
B- and C-class assets are established properties in their respective sub-markets, and new C-class apartment buildings will not be built at the same class level because construction costs are prohibitive. Additionally, C-class assets can be elevated to B-class properties with a recoverable cost basis. In most cases, the cost of entry is too high to elevate B-class assets up to A-class quality.
3. Cost of Entry = Volume
Compared to A-class assets, the per-unit cost of B- and C-class assets allows for many more units to be purchased for the same capital investment.
4. Less Competitive Acquisition Environment
Effective B- and C-class apartment management is complex, involved and downright messy. It requires hard work, singularity of focus, rehearsed professional processes, intelligent decision-making, sharpened experience, industry expertise, broad vendor connections and gritty determination. These facts can intimidate investors who are accomplished in investment acquisition, but who lack real-life management skills and experience.
AFI excels at the real-life, day-to-day management needed to support the discerning investor’s objectives.
