Smart Money Jumping into Multifamily

KKR, the fourth largest private equity firm in the world with over a half a trillion AUM, is moving into multi-family in a big way. They just announced the acquisition of a portfolio of 18 mid- and high-rise apartment complexes owned by Quarterra (multi-family development arm of Lennar). They paid $2.1B for the portfolio, or around $400k per unit. And they aren’t alone. Blackstone and Brookfield have also recently invested billions into multi-family investments.

What is going on?

At the end of 2023, Lennar owned 36K apartments that they had developed over the past decade. In their 2023 annual report, they indicated that their multi-family portfolio lost $51M. Lennar, like many class A developers, are facing stiff competition from the post-pandemic flood of new supply. They are looking for buyers to offload more properties and cut their losses.

What opportunity does KKR see?

KKR is pouncing on favorable pricing, rapidly slowing new construction and a forecast for rents and occupancy to begin to climb in the coming years. KKR believes the challenges facing MF today are cyclical and not secular, and they see today as a good entry point. In their analysis of the MF industry, they see opportunity from distressed owners selling at cap rates of 5.5% or better. The distress will come from $253B of MF loans maturing through 2026 with a loan to value greater than 80%, and 58% of loans maturing in the next 18 months with a debt coverage service ratio (DCSR) less than 1.25X. Properties trying to operate at this DCSR will have a hard time funding debt and operational expenses. In simple terms, KKR sees an opportunity to generate a 14.5% IRR by purchasing at a +5.5% cap rate, growing rents at 3% per year and ultimately selling at a 5.0% cap down the road.

What does my acquisitions team see?

We are not hunting for the same properties as KKR, but the opportunities they see in class A are evident in class B properties as well. In addition, class B properties, in some cases, offer the opportunity to increase valuations through value added strategies. Currently, we still are witnessing some operators overpaying for properties by underwriting with unachievable rent growth and expense assumptions. Hopefully through education, investors will be able to spot overly ambitious underwriting and starve them of capital. Over the longer term, it will become apparent which syndicators have done a good job with underwriting. In the meantime, we will continue to be patient and scour the market for deals with less competition.

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