The Underserved Market Developers Can Capitalize On

Developers of multifamily housing love to create Class-A properties with the latest and greatest bells and whistles. And renters, who can afford rental rates of Class-A properties, love the architecture, technology, and amenities, too. However, there is a significant untapped market around the country that is widely underserved. According to David Schwartz, CEO and chairman of Waterton, a Chicago-based multi-family developer, “what is missing in the cycle is the construction of apartments that can cater to people earning the median income.”

To serve this market, developers can upgrade value-add projects of Class-B and Class-C buildings to near Class-A status. In doing so, they can appeal to this sweet spot of renters who want Class-A, but can’t afford it. One such example is a 25-year-old apartment community in Hollywood – an expensive market – that is currently being renovated by Waterton, by adding new amenities and appliances to each unit. Rents will remain at $800/unit less than new Class-A properties in L.A.

Class-B and Class-C communities already perform well in most parts of the country, with vacancy rates below 3% in most metro areas. The reason is because most developers do not often build Class-B buildings, thus creating the need for such properties. The value is there, and the strategy can work, as long as developers ensure that the value-added Class-B rental rates are below the rent of a new Class-A property.