I'm considering passively investing in new Class A apartments, 1,000 units, $230m, in Tampa, Daytona Beach, and Dallas, 

OR

A fund that is just getting started that focuses on light-value-add Class B and C, with a goal of up to 50 complexes, maybe about a billion dollars of total value. I hear from that sponsor that with the covid and post-covid economies, Class A should be a "steady Eddie" with plenty of white collar types who can work from home.

Let's assume the operators are solid, and the metro's are solid. 

I'm wondering if Class A is a good bet or a poor one. I also hear from the WFAH sponsor that this is a great strategy that has significant tail winds.

Trying to balance out my Class B value add plays I am involved in at this time.

I think option one of investing in Class A in those cities should play out well. All growing at rapid rates - growing local economies, etc. I am sure about Tampa, and Dallas, not so sure of Daytona though.

Being from Florida. Daytona is an old city. People used to go for the Daytona 500, good food, and so many things to do. We always used to go as kids then we stopped. A lot of the fun places we went as kids got shut down. The beaches are no longer packed with families and college kids just mainly old tourists and not to the magnitude of Orlando or Miami either. I pool would stay away from there, I wouldn’t really consider Daytona A class anyways. The job market isn’t that great and just in florida it ranks as the 74th best place to live. 

Both Tampa and Dallas are growing massively. 

Think of Tampa newly acquired NFL superstars. Baseball make it to the World Series, hockey won the title and basketball moving from Canada to Tampa next season. The housing market there is going to be crazy. And has been increasing steadily the last couple of years already.

Dallas isn’t much different with growing jobs from tech places around the world and NASDAQ just having a talk with GOV Abbott to move their headquarters to Dallas. I would stick to those two places.

I guess it depends on where the class A is in Dallas.  Lots of class A built over the past 5 years or so.  I'm starting to see rent discounts ..like 1-2 months free rent advertised, so that means things are renting well in all developments.

Everyone seems to be chasing B/C.   I think there are some good opportunities if you can find the right development and right area...and right timing.   In some areas like Irving, the city over the last few years has dogged some developers to tear down C/D developments that were in tougher shape.  That probably helped create a shortage of B/C housing. 

One thing to think about is no one builds B/C.    On the downside I think so many people are chasing these, they get desperate and buy in places that are less desirable in the efforts to "do a deal". 

Originally posted by @Jason Merchey :

I'm considering passively investing in new Class A apartments, 1,000 units, $230m, in Tampa, Daytona Beach, and Dallas, 

OR

A fund that is just getting started that focuses on light-value-add Class B and C, with a goal of up to 50 complexes, maybe about a billion dollars of total value. I hear from that sponsor that with the covid and post-covid economies, Class A should be a "steady Eddie" with plenty of white collar types who can work from home.

Let's assume the operators are solid, and the metro's are solid. 

I'm wondering if Class A is a good bet or a poor one. I also hear from the WFAH sponsor that this is a great strategy that has significant tail winds.

Trying to balance out my Class B value add plays I am involved in at this time.

Depends on what type of asset but It really boils down to your return requirements. Stabilized Class A will generally offer lower returns than B/C value ad but usually offer less risk. Kind of a Bond play.

Class A ground up development can offer higher returns but longer time frames for distributions if you are looking for cashflow.

@Jason Merchey I think class a is a solid investment as it’s performed well with collections throughout 2020 overall. Steady cash flow is the key to sound investing.

Think of it this way. The concept of "light value add" - what does it really do? This is where you put a little lipstick on the thing, without improving much of anything, and then you stretch the existing tenant profile $100. You are not upgrading the tenant profile, but asking for more money from the current tenant profile without giving them much value in return.

Tell me - in 2020 - is this a good idea?

So, there goes the idea of "light value add". Talk about dangerous. If you are going to do value add this late in the cycle, specifically during COVID, you have to go heavy and truly re-position the asset and the tenant base. A lot of value there.

Class A, by definition, is preservation. It's a coupon. Unless you've made all of the money and now the concern is to store it, I don't see how Class A makes sense. You are not creating value in a meaningful way in Class A.

Thus, I would go with Option 3.

Thanks, all. 

I can say that I nixed the Class A. It just scared me too much to invest in a trio. MAYBE one property where the whole shebang can be dialed in and analyzed carefully, but three is three times the work, all for that low coupon and with little assurance of a big capital event upon disposition. I also think that it's just really hard to feel comfortable with A when all the new supply is A. At least with value-add you are ADDING value. It might be a somewhat riskier play, but you're forcing appreciation. Now, a stabilized Class B trio, that would be more reassuring. Unfortunately, the outfit that I am vetting that is offering a blind fund didn't even MENTION their property management plan in their property summary, so that option is probably going into the dustbin...

The workforce and affordable housing concept has really grown on me. I'm still vetting the sponsor in question, and finding that it's a heavy lift. These folks are a multi-billion-dollar-AUM kind of player, real institutional level, so there is a bit more of a "wizard behind the curtain" aspect to it all. As well, they are involved in senior housing -- as operators, in many cases -- and I'm just not feeling great about the legal/liability aspects of covid on the operators of senior housing. I worry that there will be some bleed or collateral damage if they start to get their asses sued off and their insurance buckles. Maybe this is not a huge risk to their separate entity that I would be investing in, but.....

As to the concept of a light rehab, well, I think I get your model, @Ben Leybovich (p.s. why not do more podcasts??!), but I think the workforce housing model can be justified in that if you're providing folks in a C+ neighborhood a B- unit, do they need new countertops, or can they just be refinished or simply cleaned? Not every complex needs new cabinets, granite counters, all new appliances, etc. I mean, Whitehaven doesn't even paint/reface your cabinets, you replace them. You're doing Ruth's Chris, and I'm talking Cracker Barrel. By definition these workforce housing units are meant to attract your teachers, your customer service reps, your two-Walmart-workers-in-the-same-household types. Your "lipstick on a pig" analogy might not be as relevant in this space. This type of complex needs good roofs, good management, good lighting in the parking areas, good pools, but not necessarily "the full Monty" like Whitehaven does in their estimable Class B+ rehabs.

Just to be clear, though, the term "light rehab" was probably my error; it's more accurate to say that in some units, they do a full replacement of counters, new appliances, and bring in washer/dryers. In some, they might do less. They do whatever will meet moderate expectations. They basically aim to do more than just "four walls and a roof" but want to stop short of trying for Class B+ because then they couldn't make the numbers work. To be clear, they actually TRY to rent to folks who are financially strapped, economically under great pressure. Those folks would love granite, but they can live with Formica. I think their ESG kind of style is a great one, for a couple reasons (not unlike what you guys did with the finishing out the unit for the handicapped prospective tenant). I also know that Fannie and Freddie (or maybe just one, I forget) is going to require that 60% of new loans go to workforce housing assets, so that is another tailwind that makes this space an attractive one to sponsors, LPs, and institutions now.

Class B and C does incur more business plan implementation risk, which is one factor to consider. Meanwhile Class A incurs more new supply/development risk. 

The comment about Class A workers being able to work from home is definitely accurate. The other factor is that when people are spending more time at home they notice more things around the complex/area than they may if they were going into the office everyday (i.e. the things about a true Class B or C they may never normally notice they now notice because they're home so often). 

A lot of the big money is delving into development, which tends to put pressure on Class A and ends in a concession fight. One strategy to consider is investing in Class A where new development is very difficult or impossible to do (there are sponsors who specialize in that strategy). Those tend to be blue states where rent control might be in place, but there's a balance between rent control and new supply constraints.