Apartment developers are turning their focus to renovating older properties rather than buying as they look for ways to expand their real estate holdings without worsening an oversupply of multifamily housing around the United States.

Construction firms say they are looking forward to a financial boost from multifamily investors shelling out for improvements with some of the more than $200 billion in reserves that's been stored away as they hold off on purchases. The construction industry has slowed in recent quarters as multifamily transaction volume hovers near record lows.

“Lower transaction volume means fewer opportunities” and less building of ground-up apartments, Richard Leach, director of renovation at construction firm Renu, told CoStar News. He spoke on the floor of the National Apartment Association’s Apartmentalize conference in Philadelphia, where the industry professionals have been comparing notes over the past week on where they expect improved demand to emerge.

Bryon Curry, a project manager with Northeast Construction, a contractor based in North Philadelphia with operations along the East Coast, echoed the sentiment, though he's hopeful improvement is on the way.

“Business was slow the beginning of the year, but things picked up in April, May, June,” he said.

With low unemployment and easing inflation numbers, that pickup may be a sign that the economy is improving, but it also may represent the first signs of a shift away from construction of new Class A developments to an investment approach that aims to improve Class B and C properties so rents at those buildings can be raised.

The pivot to the strategy of adding value comes as the apartment industry has reached record new openings of 565,000 units completed in 2023, a 40-year high, according to a report from Apartments.com.

Over the past few months, several firms have announced funds dedicated to purchasing and improving assets in need of some attention.

In February, Crow Holdings raised $3.1 billion for a value-add fund, and Heitman began raising $2 billion for its own value-add fund. This month, Pennybacker Capital closed a $1.6 billion value-add fund that surpassed its original fundraising goal by $100 million. All the funds will focus on a variety of asset types, including multifamily.

Among the companies at Apartmentalize searching for new partners is Macon, Georgia-based Arey, a new company formed from the merging of Argus Eyed Partners and Sierra Property Management. Together the companies have developed more than 2 million square feet of multifamily and commercial assets and manage more than 2,000 units across the Southeast, mostly on institutional campuses including universities and healthcare centers.

Much of Arey’s growth to date has come from development, but it may evolve its strategy to meet its goal of operating more than 10,000 units over the next decade, according to Kristin Dixon, Arey’s director of marketing.

Consolidating Argus Eyed and Sierra Property Management into one streamlined operation was the first step in that evolution, Dixon said. In the next phase, Arey will look to expand its portfolio outside its development holdings.

“Because of the way the market has turned, we can’t just develop anymore if we want to get to the unit counts that we want to grow to,” she said. The company “needs to start acquiring.”

Arey previously focused on new Class A development in tertiary markets, and while the company will look in those markets for acquisitions as well, Dixon stressed the expansion will be broader than that, and will include adaptive reuses of Class A, B and C developments across secondary markets in Georgia, Florida, Alabama, Tennessee and the Carolinas.

In other words, “stuff that needs some work, but not too different from what we know,” she said.

If history is any guide, the shift to value-add may lift construction firms higher than the recent economic climate has dropped them. For Adam Shaw, director of sales at Dallas-based T-Rock Contracting, it’s a pattern he’s seen before.

“We’re certainly in a downturn,” he said, “but spend from low times often comes back stronger he said.”

Still, the value-add plans from companies like Arey have yet to affect overall transaction volume that's near all-time lows. According to CoStar data, deal volume in the first quarter of 2024 reached just $16 billion nationwide, the lowest since the second quarter of 2020 and less than half the long-run quarterly average over the past decade. That means construction firms are still in a wait-and-see mode.

“No buying assets means there’s not much to renovate, it’s as simple as that,” said Adoteh Akue, business development manager at Texas-based Redevelopment Services. He emphasized that owners he’s worked with are “keeping money in their pocket” as they look for new assets to acquire.

Business has been focused on what Jared Adams, a national account manager at Camp Facility Services, called “life-safety” projects, or work that is required by government agencies or from city inspections.

Jerome Magee, a national business development manager at BluSky, said his clients are completing “necessary things like restorations [from disasters] … but holding off on renovations.”

Builders at Apartmentalize estimate the construction industry could feel the effects of this focus on adding value in the next six months to two years. For now, the focus is on interest rates and the upcoming presidential election.

“Hang on to '25,” said Chad Allen, vice president of the Mid-Atlantic and Southeast regions for Fincor.