Institutional Investors Pouring Equity With 'Urgency' Into Mid-Market Multifamily

It took Waterton eight months to secure $1.5B of equity commitments from global institutional investors and close its latest multifamily fund in February. Officials from the Chicago-based firm said it usually takes about 12 months to close out its multifamily funds, but the pandemic quickened the pace.

“The coronavirus created a sense of urgency,” Waterton Head of Investor Relations Michelle Wells said.

With the retail and hospitality sectors in tailspins ever since the crisis began, investors have been seeking out safe places to park their money and hopefully garner strong returns, she added. Multifamily did take a few lumps during the pandemic, but once the shock of last spring wore off, rent collections and occupancy were relatively healthy. That boosted confidence in multifamily, even if it hasn’t soared and expanded like the distribution and logistics sector.

“You have real data on how well these assets have done in the past 12 months,” Wells said.

According to the National Multifamily Housing Council, 79.2% of households among the 11.6 million units surveyed had made full or partial payment of their monthly rent by Feb. 6. That’s a 1.9 percentage point decrease from the same period one year ago, just before the pandemic swept the country.

Some renters did flee top Class-A multifamily properties in many of the nation’s downtown urban cores, especially top coastal markets such as New York City and San Francisco, Wells said. But the search for more open living spaces and neighborhoods won’t impact Waterton’s acquisitions. The firm typically focuses on value-add properties outside downtowns, and these middle-market assets fared better.

The pandemic actually opens up more opportunities for Waterton, Wells added. The downward pressure on rents seen in many urban core markets has also pushed down on prices, and for now at least, Waterton can acquire Class-A properties it most likely would have shied away from before the COVID-19 crisis.

“You are seeing pricing get disrupted in the urban core,” she said.

“Stripped of some of their most coveted amenities during the pandemic — theaters, restaurants, bars and more — cities proved less of a draw to many renters who sought cheaper living and more space from which to work from home,” according to NMHC’s February market trends newsletter. “Many smaller, more suburban apartment markets, on the other hand, benefited from this demographic shift.”

Q4 rents in the San Francisco metro area had declined 9.5% compared to Q4 2019, the second-largest drop of any market, according to RealPage data cited by NMHC. In the New York metro area, rents declined 5.7%.

In January, Waterton acquired OLiVE DTLA, a seven-story, 293-unit community at 1243 South Olive St. in Downtown Los Angeles. Completed in 2017, it isn’t a true value-add property, Wells added, but the undisclosed price was right.

The company also in January made its first San Francisco purchase. It acquired Delphine on Diamond, a 154-unit rental community in the upscale neighborhood of Noe Valley. Built in 1972, it’s a true value-add property, Wells said, but without the pandemic, it probably wouldn't have fit Waterton’s investment criteria.

The advent of vaccines and the recent decline in the number of coronavirus infections and hospitalizations could soon mean a return to normal pricing for such urban core properties, Wells added. But until then, the company will continue seeking out opportunities in core neighborhoods.

“I think we’ll do more, and we’ll do more sooner rather than later,” she said.

Other investors are also once again jumping into the multifamily sector. U.S. sales volume in Q4 increased more than 115% from Q3 to $56.7B, almost unchanged from Q4 2019, according to the NMHC newsletter, citing Real Capital Analytics data. And although overall rent growth was essentially flat for 2020, net absorptions of investment-grade, market-rate apartments in Q4 hit 78,000, the best Q4 since tracking of these numbers began in 2000.

Waterton held the first close for the new fund in May and the final close in February. The capital raise was led by an in-house Waterton team without a placement agent. Kirkland & Ellis LLP served as legal counsel.

The company will still focus much of its attention on acquiring properties that straddle the line between Class-B and Class-A, especially those in growing regions such as the Sun Belt’s suburbs, Wells said.

Waterton plans to use the $1.5B equity fund to eventually invest up to $4B, including debt, into more than 50 multifamily properties. The first acquisition was a four-property, 1,824-unit portfolio in the Atlanta metro area that closed in November.

The communities were developed between the late 1980s and the early 2000s, according to the Atlanta Business Chronicle. Waterton paid a total of $325M, or about $179K per unit, for the 554-unit Deerfield Village in Alpharetta, the 668-unit Roswell Village in Roswell, the 220-unit Briarcliff Apartments in the North Druid Hills area and the 382-unit Gwinnett Pointe in Norcross.