By: Steve Jaffe, Executive Vice President and General Counsel, BH Properties
During the most recent Great Recession, Phoenix saw property values drastically decrease and apartment owners lose tenants due to lost jobs. The domino effect resulted in owners dropping rents to maintain occupancy, which, in turn, caused them to lose out on money they would have spent to reinvest in and improve their properties, leading to further tenant loses. For many of the multifamily properties in the B- to C classes, this downward cycle was fatal.
In 2010, BH Properties stepped back into the apartment business with Arizona as its target market. The Los Angeles-based company brought its proven strategy of purchasing undermanaged or distressed assets at the appropriate price and turning the properties around in one of the markets that had been hit the hardest by the recession.
Fiesta Park in Mesa, Arizona was one such multifamily property suffering from long-term neglect and in need of BH Properties’ value-add approach. Recognizing its upside potential and believing the Phoenix market was (or would soon be) on the upswing, BH Properties purchased the complex in a short sale, making it the first purchase made by BH Properties after the market crashed almost three years earlier.
After purchasing the complex, BH Properties identified areas that needed to be restored and repaired in order for the asset to function properly and to draw new tenants. The 320-unit complex was 54 percent occupied at the time BH Properties went under contract to purchase the property and required extensive renovations to both the exteriors and interiors. Expenses were then prioritized in order to keep rents within reason to fit within the constraints of the C class property.
To add value without losing sight of investment goals, the firm focused the majority of the renovations on improving common areas and individual units. The exterior of each building within the complex was painted with a fresh color scheme, the fence around the swimming pool was repaired and new furnishings were added, and outdoor lighting was installed throughout the complex illuminating areas that may not have seemed safe before. An archway was also built in front of the leasing office to increase its visibility and provide a welcoming entrance to the complex. The leasing office interior was updated and made more inviting. Individual apartment units were refurbished with better flooring, upgraded light fixtures and resurfaced countertops. For safety, walkways and staircases were improved.
With more than $1 million in renovations completed over an eight-month-time-period, BH Properties turned the neglected complex into a clean, safe, family-oriented living space. Shortly after the final touches were made to enhance the curb appeal, the complex saw occupancy grow to 90 percent from 54 percent at the time of purchase. Gradually, BH Properties was able to increase rents and improve the overall tenant profile.
The keys to success with value-add plays are patience and a true understanding of the market and not “over improving” an asset. Phoenix, like other major cities in the Sunbelt, held all the fundamentals for a great economy and continues to strengthen along with the recovery. In addition to the area’s unemployment rate coming in at almost one percent lower than the national average, recent reports indicate a slight uptick in the median asking price per unit in the Phoenix market with an increase of 10.7 percent compared to last year’s prices.
BH Properties recognized the potential this business and family friendly environment had for a strong recovery across all sectors, especially the housing market, and employed its quick closing business model to take advantage of the primed opportunity. Purchasing Fiesta Park at the right price allowed the firm time and capital to make the necessary repairs in order to bring the complex back up to par, while the market gradually made a comeback.