Steve Jaffe Speaks on Value-Add Industrial, Multifamily
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PHOENIX—Steve Jaffe, executive vice president and general counsel to BH Properties, a Los Angeles-based firm that specializes in acquiring and repositioning challenged or distressed real estate properties, speaks exclusively with GlobeSt.com about value-add industrial and multifamily markets.
GlobeSt.com: What is your approach to value-add industrial?
Jaffe: Value-add means different things to different people and our approach is a bit more extreme. We look to identify markets that are currently suffering some sort of economic malaise where the downturn was somewhat abrupt. Or we look for markets that are more cyclical where we can time the market upswing. We try to purchase properties that may have significantly more vacancy than the competitive set of properties in the submarket ; we then buy at the right price—often at a discount to replacement cost.
GlobeSt.com: What is your tenant consideration when seeking sites?
Jaffe: We typically don’t have a tenant in tow so we have to take the leasing timeframe into consideration as we price a property. The key to our business model is patience. We know we will need time to bring the property up to par so it can be absorbed into the market.
GlobeSt.com: What other considerations are there?
Jaffe: There are only so many tenants for any given size of building. So we take into consideration the size, if and how it can be split, any layout issues and the functionality of the building. As class A buildings fill, we know our B and C class buildings will attract tenants. That can take a considerable amount of time. We have held buildings for years, believing ultimately in the market and location. In one instance we owned a vacant 500,000-square-foot building for three-and-a-half years in Kansas. We had patience. We believed in the market, which did return. GM eventually opened a plant there and there was a need for distributor space. We were able to offer that space at a competitive price point and the patience paid off. The market proved us to be right and the property has been 100% occupied for the past 5 years.
GlobeSt.com: So in some cases you have to wait for users to return to the market?
Jaffe: Users buying properties is generally a good sign that confidence is returning to a marketplace. We have had users recently buy buildings they originally intended to lease. We had one such property in Las Vegas. It made more sense for the ‘tenant’ to become an owner – which worked out fine for us. Our strategy is such that we buy at a price where we can afford to wait for the right tenant (or buyer)—but you have to have patience and a good understanding of the local market. Industrial properties can become obsolete and that’s where having that knowledge of the local market requirements comes into play. As we analyze a potential purchase, we’re looking at travel corridors for shipping purposes, ceiling heights, turning radius, truck courts, available power —if an asset has too many strikes, it will become obsolete – this means there won’t be a tenant at any rental rate.
GlobeSt.com: Let’s switch gears and talk a bit about your value-add strategy for multifamily.
Jaffe: We’ve been very fortunate in the multifamily market. We have been seeking out markets that have suffered from the downturn and prices took a severe hit. We’re focused on t B- to C class apartments as an investment. We invested heavily in Arizona. During the downturn in Phoenix, owners lost a lot of tenants—as tenants lost jobs, and ownership’s inability to reinvest in their properties, as values plummeted below loan balances, as well as Hispanic tenants moving back home across the border due to immigration enforcement policies. Many owners had to drop rents on properties to maintain occupancy, and for those complexes that were purchased at the height of the market, this was fatal.
GlobeSt.com: Is this why Phoenix seemed like a good fit for BH Properties?
Jaffe: We stepped into the apartment business in 2010. Phoenix had all the fundamentals for a great economy—it’s business friendly, it’s in the sun belt which is an historic relocation destination, and it’s family friendly. We had faith that the economy and that the housing market would recover.
GlobeSt.com: Do you have an example of this from your own experience?
Jaffe: Sure, we have a number of great examples. One such project is our Fiesta Park in Mesa. We came in at a low entry price. The prior ownership had neglected the property for the reasons outlined earlier, in addition to being an absentee ownership group. We spent a fair amount of money on improvements and long-neglected structural repairs. It took us eight months to go from 40% occupancy to 90% occupancy. We turned the project into a clean, safe, family-oriented complex.
GlobeSt.com: What are some of the challenges of the value-add multifamily market?
Jaffe: In B- and C class there is a limit to how far you can push rents because tenants have other choices. If we are too aggressive in a C class property, the tenant will simply relocate. Landlords must be as proactive as possible to address property issues in order to keeps tenants. It’s important to be hands-on and take care of issues immediately. We constantly want our tenants to know we appreciate them. To do that, we host community events, tenant appreciation days and have accessible on-site management. This is not an amenity heavy class, but it’s important to have a clean, safe place to live. When we look at a possible acquisition, we prefer access to local shopping and bus transportation because much of the work force tenancy tenants do not have cars.
GlobeSt.com: What advice would you give to someone just entering the value-add market?
Jaffe: My advice? Simply put— for someone new to our type of steep value-add investing, I would recommend deep pockets with patient capital. One should also focus on a particular (sub) market and try to learn it like the back of your hand. It’s not for the faint of heart but the returns can merit the risks.
For another inside interview with Steve Jaffe, see here.
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