How to find value-add opportunities in tertiary markets

Learn how GeoPhy Value Drivers can help you find value-add opportunities in tertiary markets.

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With the current wall of capital that is eying the commercial real estate sector, lenders and investors find it increasingly hard to deploy capital. But, according to a recent article in the WSJ, there are still plenty of opportunities out there to get strong yields by investing in and repositioning value-add apartment buildings in tertiary markets. That’s a major trend in the Western mountain states—the likes of Idaho, Colorado, Montana, Arizona. Those states attract millennials seeking a lower cost of living, and in return, boost economic growth and increase apartment rents. With NOI for rental apartment buildings rising by 7% in 2018 alone, the region had the fastest annual growth rate in four of the past five years.

Naturally, these glowing numbers have gotten investor attention. The largest and most active institutional investors across the country have invested large sums of money in these markets. Take Kennedy Wilson (a Beverly Hills-based real estate investment firm), for example, and their acquisition of both the Whitewater Park (back in 2014) and, more recently (2018), the Cottonwoods Apartments complex in Bosie, Idaho.

Understand Value Drivers

Let’s take a deeper dive into Kennedy Wilson’s most recent acquisition of the ‘Cottonwoods Apartments’ for $24 million in an off-market transaction, executed back in November 2018. Analyzing Freddie Mac K-Series loan data, the NOI for the Cottonwoods Apartments was down nearly 5% from December 2016 to September 2018, perhaps indicating an operating challenge to address.

Running this property through Evra—GeoPhy’s automated valuation (AVM) tool that exposes underlying drivers of value for commercial properties across the U.S.—the ‘Property & Income’ characteristics significantly decrease the value of the property, specifically given the ‘NOI per unit’ and age of the building. In comparison, however, the Market characteristics played an offsetting, positive role in driving value (see below chart), indicating the property could be an attractive value-add opportunity, with appropriate investments to improve the property. Digging into specific characteristics:

  • We can see that the economy as a whole, coupled with the strength of the local Boise housing market, contributes positively toward the value of this apartment complex.
  • Furthermore, looking at GeoPhy Reach, the number of educational institutions (i.e., schools) that are within a 15- and 30-minute commute (by car) from this property validate Kennedy Wilson’s investment.
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GeoPhy Value Drivers
GeoPhy Walk/Drive Reach

The above table and map are consistent with comments by Kennedy Wilson’s Managing Director, Nick Bridges, who said that “Boise has emerged as one of the fastest-growing metro areas in the United States and one of the top-performing markets in our multifamily portfolio. With Cottonwoods, we have the opportunity to add significant value through a top-to-bottom renovation program that will bring the property in line with the best multifamily properties in the area.”

If we combine Kennedy Wilson’s successful track record with the facts and figures surrounding the local market shown below, it makes sense that the firm expects they can significantly increase in NOI.

  • In 2014, Kennedy Wilson spent $6M on renovations of The Whitewater Park multifamily property in Boise and increased NOI by 70% 
  • Boise saw the strongest price growth among the country’s 100 largest metropolitan areas during the period, at 13.6%. Idaho attracted almost 80,000 new residents from other states in 2018, according to the U.S. Census Bureau’s American Community Survey with most migrating from California).
  • According to Keller Williams Realty, multifamily rents in Boise increased by 2.6% in 2019 vs. 2018.

This investment opportunity has significant potential, especially if well-executed by the team at Kennedy Wilson. Furthermore, it justifies what a lot of multifamily investors want to hear—there are still plenty of opportunities out there to add value with small renovations that bring higher rents and yields.

How to find value-add opportunities

Geophy’s Evra can be a very useful tool for acquisitions teams who are screening potential deals prior to taking a deeper dive into the underwriting process. Properties with negative ‘Property & Income’ characteristics coupled with positive ‘Market’ characteristics are fact-based indicators of a potential value-add opportunity. By simply inputting the address, NOI, number of units, and year of construction, there is a wealth of information available—delivered in about five seconds. This wealth of data gives investors a much clearer understanding of the true value drivers from a property, market, and location standpoint.


Value-add opportunities in tertiary markets that (not too long ago) were undesirable are out there. With enough due diligence, data, and insights into these tertiary markets, savvy investors can select the right properties that will maximize their probability for high returns in the right markets and locations.  

Want to learn more? Check out Evra.

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