Artemis Closes $2.2B Fund, Plans To Invest In Distressed Real Estate Across The Country

Artemis Real Estate Partners has secured its largest-ever investment haul at a time when fundraising is down across the real estate industry, and it is preparing to take advantage of the distress that many owners are facing. 

The Washington, D.C.-based investment firm just closed its latest real estate vehicle, Artemis Fund IV, with $2.2B in commitments, more than double its previous largest fund and far exceeding its $1.5B target, the firm's top executives told Bisnow. 

"This was the first time that our fund size was large enough we’ve attracted sovereign wealth interest from the Middle East and Asia, so that was new for us," Artemis co-CEO Deborah Harmon said in an interview Friday. "But the repeat of existing investors is reflective of the track record, the team, the operating partners and the market opportunity today."

Artemis is looking to spread the fund’s investments across a range of asset classes and markets, but it is especially interested in areas where it sees pricing discounts, including distressed office buildings and hard-hit coastal cities like New York and San Francisco.

In addition to sovereign wealth funds, Artemis brought in money from public and corporate pension funds, endowments, foundations and family offices. Harmon said 95% of the institutional investors from its previous real estate fund returned to put money into the latest vehicle. 

Artemis Real Estate Partners Fund IV LP, which was formed in December 2021, raised over $1.9B as of March 20 from 97 investors, according to a Securities and Exchange Commission filing.

The firm's best fundraising effort comes amid a wider slowdown in the market. Global real estate fundraising activity in the first quarter totaled $90.9B, according to PitchBook, down 42% from the same quarter last year and representing the first quarter in at least five years that funding has fallen below $100B. 

Harmon said it has been "highly difficult" for many real estate fund managers to raise institutional capital in today's market, but Artemis was able to overcome that challenge because of its strong partnerships and because of the investment strategy for its latest fund. 

That strategy, Harmon said, involves taking advantage of the "tumultuous nature of the capital markets."

The rapid rise in interest rates over the last year, combined with the collapse of three regional banks in recent months and a pullback from big banks, has left many real estate owners underwater and unable to refinance their assets. Harmon said these situations are prime opportunities for an investor like Artemis to swoop in. 

The firm can deploy money in multiple ways, from joint venture equity to preferred equity to mezzanine debt, Harmon said. 

"The regional banking crisis and challenges in the market are not over, and we think we’re going to see continued dislocation in that sector that will give us opportunity to step in and provide joint venture capital, rescue capital, recap capital, and that should be a significant source of opportunity," she said. 

Many of the firm's investments involve teaming up with a local joint venture partner, and Harmon said it has 120 existing relationships with developers across the country. She said she now sees opportunity to expand its network and partner with more developers that have been victims of the regional bank issues. 

"The distress in that sector is going to create increased middle-market opportunity for really strong joint venture operating partners that are just with the wrong regional bank," she said. 

Harmon has seen times like this before. She started her career in 1990, amid the savings and loan crisis, and she co-founded Artemis during the Great Recession in 2009.

She founded the firm with former Commerce Secretary Penny Pritzker, and she now leads it alongside co-CEO Alex Gilbert. Artemis' previous three real estate funds raised totals of $436M, $580M and $1B, and it closed a $1B healthcare fund last year. 

Artemis has 90 employees across its Chevy Chase, Maryland, headquarters and outposts in New York, Los Angeles and Atlanta. Its latest $2.2B fund is being managed by Michael Vu and Rich Banjo. 

The firm has already invested about 10% of its latest fund, and it is one year into its four-year investment period, meaning it has to deploy about $2B in the next three years. 

To do that, it is beginning to look at asset classes and cities that many capital sources in today's environment wouldn't touch with a 10-foot pole.

The firm in recent years was focused on hot asset classes like multifamily and industrial and fast-growing markets in the Sun Belt, but it is now turning its attention to the properties and markets that are seeing massive drops in pricing, such as offices and struggling coastal cities. 

“We are looking at it,” Gilbert said of the office sector. “We’re considering it. Our view is probably that pricing needs to continue to adjust, but it’s on our radar.

"We’re also starting to look harder at some of the coastal cities like a San Francisco, a New York, a Boston that, while they might not have the same significant job growth [as the Sun Belt], they have more pricing adjustment and the ability for distress."  

The office sector nationwide is estimated to lose a collective 49% of its value by 2029, according to a study by researchers at New York and Columbia universities, likely creating a host of opportunities for investors looking to buy distressed assets. The issue is even more acute in the country's large coastal cities. 

A JLL report published last week found that 15M SF of office in New York City is underwater, meaning its valuation has fallen below the balance of the owner's loans on the asset. San Francisco and D.C. are seeing office valuations plunge to the point that their city governments are facing revenue shortfalls of hundreds of millions of dollars due to lost property taxes. 

Artemis thinks the pricing correction in the real estate market is just beginning. The company has remained cautious in its investment strategy, acting as a net seller over the last two years. But with the fund closing, Gilbert said it is preparing to get more aggressive. 

"We expect to have more opportunity at the end of 2023 and going into 2024," he said. "There's no secret that real estate values are down, interest rates are up, and real estate is a levered, capital-intensive business. So we see a tremendous opportunity."