It’s the perfect neighborhood! So clean and refreshing! New retail is going up within a mile with all of the newest and best anchor stores. The schools — all of them — just scored near the top in scholastic achievement. The neighbors wave as you drive by. And what crime? The best part is that you have secured a contract on an original grade, 1982 building that is in desperate need of updates. But how far can you force class scale movement up? We’ll examine the truth behind moving a C-multifamily to a B-multifamily in this blog.
What is class scale movement?
Each asset in commercial real estate has a class designation. We’ve written about commercial multifamily class A, class B, class C and class D assets and their characteristics. We also introduced you to the plus and minus designation that comes along the big letter grades.
By definition, the asset described in the opening paragraph is a class C asset, but by contrast, the surrounding neighborhood is not. Applying neighborhood class criteria to the description yields at least a B-class. Argument could certainly be made for a B+ or even an A- neighborhood.
But the question remains: what is class scale movement? While we touched on this briefly elsewhere, the essential idea is: how far along the A through D scale can you move your C asset?
Realistic expectations and moving a C-multifamily to a B-multifamily
What is particularly pertinent is that you apply realistic expectations to pushing your asset along the scale. There are the occasional commercial multifamily assets that look like A-class assets but were actually built in the 1960s or something. But that is situation is atypical.
A more typical approach to your update project is to move it up a half latter grade. In our example, that would mean moving our complex from a straight C to a C+.
Where to start
What is your competition doing? Does your project have similar amenities? What do their units look like? These are the questions you will need to ask in order to make positive changes to your asset.
This kind of investigation is critical to your success and is therefore one of the first items on your to-do list. In the jargon of commercial multifamily operators, this exercise is called “shopping the asset”.
With a beat on your competitors, you’ll either be able to match the amenities packages with your upgrades or offer your tenants rents that are compatible with your project’s position.
Especially important in this process is to survey your renters. While it is certainly possible to get through this process without this step, surveying and engaging with the renter pool will give you invaluable information on your project.
Some items you might learn:
- How happy your renter base is, and why
- What is broken and why
- The kinds of amenities renters are seeking
- What is missing from their rental experience
- How much your renters are willing to pay for what upgrades
Combining this information with your shopping expedition will shed light on where your investment dollars are to be spent.
Few of us have the wherewithal to update an asset just for the sake of it. Therefore it follows that with all of the data you obtained shopping and surveying, you will want to get the most bang for your buck.
The basic premise is that you’ll want to maximize your returns. For every upgrade, there will be a rental rate increase. And we know that rent rate increases lead to higher asset valuations. Weighing the dollars to be invested against the estimated rent rate increase will guide your decision making.
Other decision nodes to be made around upgrades and updates:
- How long will it take to finish the proposed upgrades?
- Will tenants readily slide into new leasing arrangements that account for the upgrades?
- What length of time are these upgrades good for and when will more investment need to be made?
There is undoubtedly a great deal of legwork necessary on the front end. But in the end, when all of the updates and upgrades have been installed, you’ll have an updated asset a half letter grade higher and an asset that is now worth more than when you started.Tags: amenities, class, Class B, Class-C, maximize returns, micro, reposiitoning, ROI, Scale, surveying, upgrades