When and How Value-Add Strategies Make Sense

Authored by Jonathan Needell, President and Chief Investment Officer

March 28, 2022

Value-add can be an excellent investment strategy – particularly in the multifamily market, where prices are rising, cap rates are low, and competition among investors is fierce.

Investing in an apartment property where there is opportunity for improvements to be made and implementing those improvements, adds value to that asset and benefits investors and tenants, as well as the surrounding community. However, while it sounds like a win-win proposition, value-add does not necessarily make sense for every multifamily asset.

The question is, when does a value-add strategy make sense?

Kairos Investment Management has been utilizing value-add strategies since the Company founding and in 2020 introduced its most current Value Strategy, which targets multifamily, but also invests in other sectors. We believe class B assets are primed for capital and operational improvements, based on our market research and our combined expertise in this realm. We have found that value-add strategies make sense for many middle-market investments – the type of pre-institutional-size assets in which we specialize. And, we believe there are specific situations in which a value-add investment strategy is worthwhile. Here are some of those situations.

  1. Investing where the opportunity to add value is greatest

Institutional assets typically undergo rigorous capital improvements as part of large investors’ portfolio-wide asset management programs aimed at maximizing value. Because these properties are usually newer and well maintained, opportunities to add significant value may be reduced.

On the other end of the spectrum, individual investors traditionally have limited cash flow and are constrained in the degree of upgrades they can afford to implement.

Conversely, middle-market investors can often identify and leverage value-add opportunities that have been overlooked or rejected by institutional and individual investors. With an investment size of $5 million to $30 million, the middle-market is the Sweet Spot on which our company focuses, and it is where we can add the most value.

  1. Investing where the buyer pool is shallower

Based on supply and demand, the more buyers chasing after an investment property, the higher the price is likely to be to purchase the asset. This tends to be the case in institutional multifamily investments in particular, where the buyer pool runs deep and is growing deeper, and supply traditionally falls short of demand.

To create the most value, investors must first acquire assets for a reasonable price. Properties with a lower price tag are usually found where there is less competition, which is one of the reasons why off-market value-add deals that have fewer competitors to bid up the price are so attractive. Kairos has become adept at identifying off-market opportunities for this very reason.

  1. Investing where the market is cooler, but showing the potential to heat up

Institutional buyers like to concentrate on primary markets that are attracting other large investors. While these proven markets have history on their side, they have a habit of heating up quickly, which drives up pricing and increases the difficulty of closing deals, making a value-add strategy harder to implement successfully.

Middle-market investors, however, seek out properties in markets such as Phoenix, Las Vegas, Salt Lake, and Orlando that are less sought after or “cooler”— but not so cool that strong fundamentals for investment are missing. Rather, these are growing secondary or tertiary markets with potential to heat up in the near future – markets that either have yet to be discovered by the institutions or don’t meet their investment criteria – yet!

What makes multifamily properties in these secondary or tertiary markets especially useful to middle-market investors is how well they match with value-add investment strategies. Kairos has implemented its Value Strategy on properties in numerous secondary markets throughout the country. The Strategy seeks to make value-based investments on what we believe to be advantageous pricing terms resulting from market inefficiencies and dislocations in the current economy. The focus is on intrinsic real estate value that translates into what we believe will be long-term cash flow and value enhancement.

Value-add investment strategies can be very effective in the middle-market multifamily arena. By investing where the opportunity to add value is greatest, where the buyer pool is shallower and the market is cooler with the potential to heat up, we believe investors can reap the benefits of a well-planned value-add strategy time and again.


* This content is meant for informational purposes only and should not be construed as a recommendation, an offer of services, or an offer to sell, or solicitation of an offer to buy a particular security or investment strategy. There are no guarantees that any specific investment strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. The views and opinions expressed in this article are solely my own.

For questions, contact investor relations at investorreporting@kimc.com or 949-800-8500.

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