A New Joint Venture Enters The Crowded Value-Add Multifamily Market

Plymouth Meeting-based 5 Cap Realty has launched a joint venture with investment firm JMP Group to enter what is shaping up to be one of the most competitive areas of commercial real estate — suburban, value-add multifamily properties.

5 Cap and its affiliate, RREIC Advisors, have had a property management arm called Forty2 for three and a half years now, and the company's success in improving multifamily assets it managed signaled an opportunity to RREIC Managing Director David Reiner.

“The expertise that [Forty2] brought in their ability to add value to undermanaged assets exposed a fairly common problem, based on data we saw,” Reiner said. “It turns out they were able to produce higher revenue and turn around these assets in pretty remarkable fashion.”

One of the properties that Forty2 improved with its management was Grove Mountain Park in the suburbs of Atlanta, and its performance inspired 5 Cap to own properties itself. It enlisted JMP as a source of capital and to help with recruiting more investors and started a joint venture that aims to acquire $1B in assets, starting with Grove Mountain Park and Summer Chase, a multifamily development in Limerick, Pa.

“Both assets, for different reasons, had real value-creation opportunities,” Reiner said. “We believe that both assets were undermanaged, and the Atlanta project, we were able to take over management before we closed on the deal, and have been able to add substantial value and revenue in the six months that we’ve managed it.”

Those two first acquisitions fit the mold that 5 Cap’s JV aims to target over the next few years — 250- to 300-unit multifamily assets, most likely in the suburbs of major cities, that can yield substantial value with better management, updated marketing and physical improvements. Increased rent comes part and parcel with value-add, and this case is no exception.

“We take a more aggressive approach in terms of management and driving rent,” Reiner said.

The JV aims to add 10 to 12 properties per year, focusing in markets like Philly, Atlanta and cities in between on the Eastern Seaboard, and as far west as Indianapolis. But with the cycle entering a late stage and so much new supply coming online in urban areas (especially Center City), value-add suburban multifamily is not exactly an untapped market.

“It’s a good pace, and a great goal,” Madison Apartment Group Executive Vice President Greg Curci said of 5 Cap’s plan. “My only skepticism is that it’s increasingly difficult to buy apartments these days, because the majority of the equity out there for apartments is targeting precisely this class of value-add, suburban model.”

The capital 5 Cap and JMP are bringing to the market is a drop in the bucket relative to what is already out there looking for value-add opportunities, according to Curci.

“It’s universally understood that transaction volume is down drastically this year, primarily because less has been offered for sale in multifamily than in the last two or three years, but there’s certainly a lot of equity out there that wants to buy,” Curci said. “So I see pricing only intensifying this year and into next year, because a lot of groups are looking for the same investment that 5 Cap is looking for.”

Reiner believes he will be able to capitalize on some eager investors biting off more than they can chew, especially in the tougher overall market conditions that may be on the horizon.

“Even though all those things are going to grow, developers are developers and they’re going to overdevelop in a number of locations,” Reiner said. “And we think we have the capital and the expertise to take advantage there.”