In 2019, the occupancy rate for multifamily buildings sat at 96.3%, the highest it’s been since 2000.Historically, apartment renters were perceived as individuals with a lack of capital, or as temporaries looking for a place to hold up while the house with a picket fence became obtainable. Today, this notion couldn’t be further from the truth. Apartment life has gained significant traction with modern Americans, and even those who have the finances to purchase that ‘American Dream” home are beginning to look at apartment renting through a long-term lens. For investors, this new perspective of renting as a permanent option presents an incredible opportunity to create solid returns on capital while maintaining an attractive risk profile. The perks of multi-family real estate are endless, from high cash flows, to the use of leverage, tax breaks, and of course appreciation, the list goes on and on and on. Any of the 3 property classes - A, B, or C - will provide these benefits to some extent, so what’s with all the hype for Class A?
What Does "Class A" Mean?
Well, first let’s start by distinguishing the asset type. Unlike class B or C, Class A apartments typically need little to no renovations. Usually less than 10 years old, these are the luxury apartments, located in trendy and desirable neighborhoods with top amenities and upscale features. These are the properties that have fueled the desire to opt out of home owning and into long-term renting. These Class A assets usually have low vacancy rates, and are rented out to high-income earning professionals looking for access to their neighborhood’s finest shops, offices, parks, and schools. These areas are extremely stable, and often virtually irreplaceable.
“Class A” Advantages
Class A apartments provide investors with security. Knowing that your hard earned capital is protected by top tier properties with reliable tenants and little to no outstanding issues requiring further capital expenditures allows for relaxation and a good night's sleep. Furthermore, due to the mass appeal and ability to command high rent, Class A apartments provide strong cash flows and often appreciate quickly. For these same reasons, lenders also love Class A and will often offer more attractive debt terms on Class A buildings than they typically would on Class B or C buildings. This in and of itself represents the value of Class A. If investors are able to secure a quality asset in a prime location that also has some sort of barrier to entry (ex. limited space to build new complexes) new competition becomes unlikely. Supply is limited, demand is strong, and risks are reduced. All of these advantages are provided upon acquisition and without the need for significant renovations or capital infusions.
Many investors are beginning to realize that while Class B and C value-add properties may provide slightly higher returns on paper, the variables associated with executing the investment plan are often large in quantity and present risks that ultimately reduce the quality of the investment. For Class A properties these variables are significantly reduced and often completely eradicated. In other words, Class B and C properties are businesses that need to be revived, whereas Class A properties are businesses that are already performing well, and will likely continue to grow. With the location providing stability, the debt terms providing flexibility, and the asset itself providing demand, Class A assets provide investors with a solid foundation FIRST, and a recipe to grow from there.