At Trion Properties, we invest in multifamily real estate—specifically, we specialize in value-add projects. We acquire underutilized assets in improving areas and convert them to modern, attractive places to live. Through extensive renovations and hands-on management, our team optimizes net operating income (NOI) and adds economic value to each investment. Here we explore how our rigorous investment approach helps us meet our long-term objective of delivering outsized returns without taking outsized risks. We also share our views on investing in the current market as a new economic cycle emerges in 2021.

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Identifying the right markets

When identifying markets well-suited to our investment approach, our philosophy is simple: We target markets where we can successfully operate throughout the real estate cycle—not just when times are good. This means focusing our efforts on areas with sustainable growth supported by a diverse set of strong economic drivers and favorable supply-demand dynamics. Before entering a market, we conduct in-depth analysis on supply and demand factors. On the demand side, we look for persistent tailwinds, including a steadily growing population and high quality of life. We also consider local vacancy levels and rental demand. In terms of supply, we examine current and forthcoming supply. We avoid areas with robust supply pipelines—often the case in locations where land is abundant and new construction is plentiful—as this drives down rental rates. Additionally, we examine if the given market has sufficient housing stock in our core area of expertise: Multi-family properties built in the 1970s and 1980s. For an example of our approach in action, consider Colorado Springs, CO. We recently entered the market after first getting to know the city’s larger neighbor, Denver, and identifying a key phenomenon here that is materializing in several regions nationwide: At the same time an urban center is becoming more expensive, people are increasingly able to work remotely or commute, and they are seeking a higher quality of life. Alongside a lower cost of living, these factors bolster demand for housing in nearby mid-size cities—in this instance, Colorado Springs. The diverse economy in Colorado Springs benefits from its proximity to Denver, which enables workers to commute, as well as its own healthy pool of high-paying aerospace, engineering, and technology jobs, thanks to the significant number of military bases and defense contracting businesses located in the area. Furthermore, supply is limited, leading us to be bullish on rent growth.

Sourcing and acquiring attractive properties
After identifying the right markets, we get to work finding and buying the right multi-family properties at attractive valuations. Our ideal building is a blank canvas, largely untouched for 10+ years. This empowers us to make exactly the improvements we want, unlocking maximum value for our investors. We favor properties with accessibility to transportation and major employers. For example, our Forty6Twenty Apartments in Culver City, CA are located within a major employment corridor, minutes from offices for Facebook, Snapchat, and Google. Naturally, a critical determinant of our investment success is establishing an advantageous purchase price—in fact, we believe the ultimate success of any of our investments is dictated in large part by the purchase price. We believe money is made on the buy. Our valuation analysis begins with a straightforward initial screen incorporating market-specific assumptions and solving for return on cost. Properties which pass the initial screen are then fully modeled by our team. We consider our expertise in modeling potential investments to be a key contributor to our overall success. Our detailed models include highly accurate project budgets backed by years of hands-on experience—final project costs typically land within a few percentage points of our initial budgets. We also draw on experience to identify the optimal capitalization structure, working to avoid the pitfalls of over- and under-leveraged deals. Lastly, we model multiple scenarios, including stress tests and sensitivity analysis of exit cap rates. An important component of our ability to capture favorable entry prices is our exceptional skill in sourcing off-market deals (properties not listed for sale or advertised). The greatest benefit to finding an off-market deal, particularly when the real estate market is hot, is the ability to actively circumvent competition. Historically, the majority of our deals have been off-market properties, an advantage we intend to carry forward. Thanks to the years our co-founder spent as a senior broker, we draw on first-hand knowledge about the ways in which brokers generally prefer to work with buyers. As a result, we know how to be a fantastic counterparty; we are known to perform. When our team is awarded a deal, we move through the process quickly like a well-oiled machine. This ability to transact seamlessly helps us create and maintain a sterling reputation and trusted relationships—which helps us source even more off-market deals.

Unlocking value with extensive, customized renovations
During the renovation phase, we take a customized approach determined by target rental rates for a given property. Our renovations are typically more extensive than other Class B products in the marketplace, helping us achieve higher rent and/or optimize income through reduced vacancies and increased lease renewals. This approach positions us to increase the value of the asset and deliver superior returns to investors. We update unit interiors, often installing vinyl plank flooring, stainless steel appliances, new fixtures, and cabinets along with bathroom remodels. We fully reset all common areas, adding high-value amenities such as dog parks, outdoor lounges, bike storage, delivery lockers, and fitness centers. We also reposition assets by completing full exterior renovations featuring fresh landscaping, new signage, and modern paint schemes. Our team is closely attuned to the evolving needs of renters and is experienced at developing creative solutions—for example, converting former rec rooms into co-working space to meet growing demand for convenient places to work and study remotely. Value can also be added by creating property-specific websites, where residents can easily pay rent and submit maintenance requests. Many elements of our process are vertically integrated. Our effort to bring functions “in house” is a key point of differentiation from competitors and ultimately benefits our investors. During the renovation phase, project management is handled in house. We also prefer to handle construction in house or partner with construction companies working primarily for us. With regard to property operations, we self-manage in markets where our team is experienced and knowledgeable about local laws and customs. In markets we have newly entered, we often begin by utilizing external partners as we quickly gain the experience needed to successfully bring management in house. In sum, our commitment to vertical integration sets us apart from peers and allows us to better control quality and costs, including capital expenditures and operating expenses. This increased efficiency translates to higher NOI and, ultimately, higher returns for our investors.

Offering buyers a high-quality, turn-key asset
When exiting our investments, we focus on maximizing value by offering buyers a high-quality, turn-key asset with attractive cash flow. We offer differentiated, well maintained properties featuring some of the most desirable improvements in the market. Notably, tenancy in our buildings is consistently top notch. We undertake an onerous screening process to ensure stable, strong tenancy with minimal bad debt. In most cases, we are positioned to sell a property after a three- to five-year holding period. Refinancing is also an option once a significant percentage of units are renovated and the asset is largely stabilized. It is important to note that we are able to continue operating all portfolio properties through the ups and downs of the real estate cycle: Because of our prudent investment approach, we can ride out difficult environments, then exit once conditions have improved.

Is now a good time to invest in commercial real estate?
In short, we think it is a great time to invest. We believe the U.S. is currently in the early innings of a new economic cycle, which is typically the optimal time to invest as rates are low and real estate supply-demand fundamentals are strong. In the early stages of this post-COVID recovery, however, we believe deep experience and a focused, selective approach are especially critical. At Trion, we are uniquely able to draw on the transaction and operating experience we gained during the global financial crisis of 2008-2009—a challenging period during which our strategy thrived. Co-founders Max Sharkansky and Mitch Paskover created the company in 2006 to acquire mispriced and mismanaged properties throughout Los Angeles. Trion executed several acquisitions in its first two years and exited the portfolio ahead of the economic crisis. With cash on hand, the team began implementing a strategy targeting distressed debt secured by multi-family real estate and lender-owned multi-family assets, which led to the successful acquisition of 20 properties throughout the crisis. Our expertise served us well in 2020. While many of our competitors were on the sidelines in “wait and see” mode, we were able to transact opportunistically. In April, we adjusted modeling assumptions to reflect large collection drops, sizeable declines in rents, and other headwinds, then identified valuations at which deals would make sense. As we went out into the marketplace, we found forced sellers amid generalized panic and little to no competition, enabling us to complete multiple deals at attractive discounts. Looking ahead, we are confident our track record of success in a variety of environments will serve our investors well as the economic recovery gains momentum. We are proud to be differentiated by our specialized focus and exceptional expertise. Importantly, we are further differentiated by our commitment to trust and transparency across all investing environments: Each of our deals is audited by a reputable, third-party accounting firm and we use a third-party administrator.