When it comes to Class-B and C multifamily properties, there's a huge, untapped market—and it's one that's not being properly met, a developer says.

"What is missing in this cycle is the construction of apartments that can cater to people earning the median income,” says David Schwartz, CEO and co-chairman of Waterton, a Chicago-based multifamily developer.

With value-add projects, developers upgrade Class-B and C buildings to near Class-A status. In doing so, they can appeal to an underserved sweet spot of renters who want Class-A but can't afford it.

In one example, Waterton's in the closing stages of renovating a 25-year-old apartment community in Hollywood—an expensive market—adding new amenities and appliances to the 345 units, NREI reports.

Rents will remain at $800/unit less than new Class-A apartment properties in LA, Schwartz says. Class-B and C communities already perform well in most parts of the country, with vacancy rates below 3% in most metro areas.

“This is because developers do not often build Class-B buildings,” Reis economist Barbara Byrne Denham says. Value-add projects work best in markets where there is a wide difference between the average rental cost of a new Class-A apartment compared to a Class-B or Class-C unit.

“And the strategy can work,” Marcus & Millichap director John Sebree says, as long as developers make sure the value-added Class B property "is going to be below the rent of a new Class-A property.” [NREI]