By the end of 2016, there will be over 350,000 new apartments coming online across the country. Waterton CEO David Schwartz, a panelist at Bisnow's BMAC Midwest event Nov. 30 at the JW Marriott Chicago, says the impact of that activity is already being felt in the Class-B multifamily market that is Waterton's sweet spot.

Waterton, which focuses on value-add multifamily and manages a portfolio of 50 communities totaling over 20,000 units in 16 markets, looked at 400 deals this year and only acquired six properties. David (right, with wife Jamie Diamond Schwartz and The Atlantic national correspondent Jeffrey Goldberg at last year's luncheon benefiting the US Holocaust Museum) says that percentage resembles the Cubs' batting average in Game 1 of the World Series.

The increased competition for value-add hasn't changed Waterton's acquisition strategy. David says the firm still loves well-located apartment communities in major markets with room to add value, raise rents and occupancy, and meet opportunistic return thresholds. To that end, Waterton is willing to assume a loan with above-market interest if the value-add is there. With increased competition to win an auction, Waterton will end up buying properties with debt that can't be pre-paid or carries owner penalties.

David says an example of this is one of Waterton's 2016 acquisitions: Soleste West Gables, a new construction apartment community in West Miami. David says the original developer gave up tenant concessions that were below market value, and made decisions with finishes that weren't on par with new construction in the market. David says Waterton bought the asset because it saw the long-term upside, and is already working to reposition the property, which will include renaming the asset.

The main metric driving investor competition for Class-B multifamily is a major increase in rent spreads. They've outpaced their Class-A counterparts the past three years, thanks to a combination of demand being higher than supply and that most of the new apartments are super-luxury units built for people with high household incomes. Workers who make 80% of the median household income can't afford Class-A, and there's no supply in Class-B.

David says this trend will continue unless Class-A rents begin to slide to meet the level of Class-B. This is already beginning to happen in some markets, like Houston, where demand for Class-A has contracted compared to supply.

Another factor in the lack of supply in Class-B multifamily is functional obsolescence. David says Waterton has looked at assets on the market with design aspects that are hard to correct, like low ceilings or a lack of washer-dryer hookups. Waterton might be able to sell through these assets if they were in major markets with good locations, but he wouldn't bother acquiring them in non-core areas, as it would be difficult to lease the asset or exit the investment.

To learn more from David and our expert panelists, attend Bisnow's BMAC Midwest event Nov. 30 at the JW Marriott Chicago. Register here.