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With Opportunities Dwindling, Multifamily Investors Are Turning To Different Strategies To Get Deals Done

Acquisition opportunities for multifamily investors in 2017 have been slim as a record amount of capital flowed into the debt and equity space, and the members of the private equity and investment panel at Bisnow's Big Midwest Multifamily event last Wednesday have had to exercise patience.

Antheus Capital Founder and Principal Eli Ungar, LEM Capital Senior Vice President Joshua Grossman, Marc Realty Capital Principal David Ruttenberg, MZ Capital Partners Managing Principal Michael Zaransky, 29th Street Capital Managing Principal Robert Bollhoffer and CohnReznick Partner Jason Burian
Antheus Capital founder and principal Eli Ungar, LEM Capital Senior Vice President Joshua Grossman, Marc Realty Capital principal David Ruttenberg, MZ Capital Partners Managing Principal Michael Zaransky, 29th Street Capital Managing Principal Robert Bollhoffer and CohnReznick partner Jason Burian

Robert Bollhoffer, managing principal of workforce housing specialist 29th Street Capital, said 2017 was his firm's slowest year ever. To date, 29th Street Capital made two acquisitions and 14 dispositions. Bollhoffer said 29th Street Capital typically does 25 acquisitions annually.

"We have 15 offices across the country, each guy does 1.5 deals a year. So that's a lot of guys sitting on their hands and it's tough to tell them 'no' to opportunities with little upside, when they're incentivized to do deals," Bollhoffer said.

Marc Realty Capital did a deal every 10 to 15 days from 2009 through 2015, principal David Ruttenberg said. Last year, Marc Realty Capital did 10 to 12 fee simple deals; this year, it only did three deals.

Ruttenberg is seeing more competition for hard money loans, as equity funds are now moving capital into the debt space, and the firm is even partnering with these groups to get deals done in and outside of the Chicago market.

Ruttenberg said dry powder is a huge issue. Sellers who cannot get the cap rates they seek are more than willing to refinance and wait until they find a buyer and realize the internal rate of return they want. With scarce opportunities available, Ruttenberg said Marc Realty Capital is making a push into hard money lending.

"If we think an asset is worth 80, it's trading for 100 and someone can't get a traditional bank loan, I can lend 70 and if we have to take the asset back, we're in a better position. Typically, we get paid off," Ruttenberg said.

Marc Realty also moved into more venture capital and private equity deals. If Marc Realty invests in a company and it does well, it can get the sale-leaseback and add real estate to the portfolio. Eventually, Ruttenberg wants to move Marc Realty back into good real estate deals, but they are hard to transact right now because of outsized seller expectations, and refinancing is still favorable for an owner.

"You can still borrow for 10 years in the low 4% interest rate range, so why would someone sell at a six cap when they can borrow 80% of the value at 4.25%? Sophisticated sellers would rather not sell for a cap rate we want to buy at," Ruttenberg said.

Bollhoffer said 29th Street Capital is planning for a downturn. The firm has not partnered with funds to execute deals, and instead identified the equity partners they want to deal with over the next two years, particularly ultra high worth technology companies. Moving forward, 29th Street Capital is seeking slight value-add redevelopments and partnering with investors that can give them the money.

"That's patient capital," Bollhoffer said.

BH Management President Joanna Zabriskie, AMLI Resdiential CEO Greg Mutz, Waterton Chief Investment Officer Rick Hurd, Atlas Residential Chief Investment Officer Leslie Andren, Kirkland & Ellis Partner Joshua Hanna and The Habitat Company President Matt Fiascone
BH Management President Joanna Zabriskie, AMLI Residential CEO Greg Mutz, Waterton Chief Investment Officer Rick Hurd, Atlas Residential Chief Investment Officer Leslie Andren, Kirkland & Ellis partner Joshua Hanna and The Habitat Co. President Matt Fiascone

Atlas Residential is also seeking value-add deals, and Chief Investment Officer Leslie Andren is finding those opportunities in Chicago hard to come by these days. Atlas bought Brookview Village, a 425-unit apartment complex in Gleniview, from Speedwagon in October for $73M. Andren said the price topped the market, but Brookview Village was a unique situation, location and history which compelled Atlas.

"We were fortunate enough not to press the numbers too hard to make it work. For us the interesting thing on that transaction is our common equity partner on the deal is one of China's two largest equity funds," Andren said.

Foreign funds typically want to invest mainly in major markets, so Atlas is trying to avoid competition by seeking value-add opportunities in major suburban markets. Andren believes that western Michigan is a sleeper market.

MZ Capital Partners principal Michael Zaransky has not had to be quite as patient as our other speakers. He said deal flow in early 2017 was slow, likely as a result of sellers adjusting to broker opinions of values coming off last summer's highs in a stabilized multifamily space. But as Q2 moved into Q3, a surprising number of assets hit the market.

Deal flow is robust well into Q4 and competition is fierce for well-located assets, especially value-add properties. Zaransky said the brisk activity in 2017's back end makes him optimistic for a busy 2018. MZ Capital Partners plans to be a net buyer.

While our investors have their eye on value-add, Class-A multifamily may be in a bubble.

"There's just too much supply," AMLI Residential CEO Greg Mutz said.

Of AMLI Residential's nine markets, Chicago is the most oversupplied, Mutz said. That is most true downtown — AMLI's suburban assets are slightly outperforming downtown. AMLI Residential completed its 2018 budget reviews and penciled in a 1.1% increase in net operating income growth.

Mutz said the company cannot make the numbers work with new development. With hard costs rising, flat rent growth and affordable housing requirements to consider, the profit margins have tightened considerably.

"We've got pressure on taxes. Insurance will be problematic," Mutz said. Mutz said AMLI is not giving concessions on lease-ups, and lease renewals are at or below current collected rents.

Mutz said that he sees Houston, Dallas and Austin outperforming Chicago next year. In Houston, AMLI is delivering 1,900 units, which is a record low. But Hurricane Harvey wiped out a lot of product and Mutz sees this as an opportunity to land tenants.

Rising construction and labor costs mean AMLI is unable to make development in neighborhoods like Wicker Park and Logan Square work, Mutz said, and for the first time in a long time, AMLI has no new developments in Chicago. The Habitat Co. President Matt Fiascone said those neighborhoods command smaller rents, which puts a further dent into projected revenue.