Helping Investors Find Needles in Haystacks
Locating underpriced workforce housing can be difficult, but once found, rents can be raised by as much as 20% without losing occupancy.
CHICAGO—Almost every market in the US suffers from a lack of workforce housing, and the consequent demand for such units has encouraged many national investors to buy up them up when available. But pinpointing great value-add opportunities can be difficult and require a lot of detailed, granular knowledge of local markets.
Enodo, an automated underwriting platform for multifamily real estate, believes it has the metal detector needed to find these needles in haystacks. The Chicago-based firm recently applied price and cap rate prediction algorithms to its database of 1.7 million assets nationwide to identify the nation’s most undervalued multifamily properties.
“We’ve pulled tens of thousands of data points on these properties and their markets, and we’ve done that on a national basis,” Marc Rutzen, Enodo’s chief executive officer, tells GlobeSt.com. This data provides a much clearer picture than traditional methods such as examining rental rates in a given zip code. And the research shows owners of assets identified as underpriced can raise rents by as much as 20% with minimal loss of occupancy.
The company identified 9,000 multifamily properties across the nation as undervalued. Every market in the US has such assets, Rutzen says, and some characteristics seem common. Many, for example, were built in the 1970s and early 1980s. And very large garden-style developments, ones with more than 500 units, have a greater tendency to underprice their units, especially if they are relatively isolated from similar properties. In these cases, many landlords don’t really have any proper comps to help adjust rental rates. Instead, they simply compare the units to others within the same development. This can cause a vicious circle as “underperforming units become the benchmark for other underperforming units.”
It’s not a surprise to any sophisticated investor that underpriced assets populate most markets, he adds. “People understand this intuitively, but it’s another thing to see all of this data plotted on a map.” And if a private equity firm or other significant investor wants to efficiently deploy capital and diversify a portfolio with multifamily properties, “it should be driven by the best possible analytics.”
Frequently, big players will partner with local firms, ones with detailed knowledge of a given market, to track down opportunities. Rutzen expects such local partnerships to continue, “but you’re not going to need to scour the markets.” The analytics, derived from data on 21 million apartments, will point the way toward off-market opportunities, and then feelers can be extended to owners as well as potential partners. “It will take a lot less time to get deals done.”