Multifamily Equity Capital Turns Away from Ground-Up Builds

Dekel Strategic Investors, a division of Dekel Capital, is shifting its multifamily equity capital strategy to focus on value-add and core-plus deals. The firm is moving away from ground-up development, which it says no longer offers an attractive risk-reward profile. The new strategy will continue to make small balance equity investments ranging in size from $5 million to $15 million using 65% leverage. We sat down with Shlomi Ronen, managing principal at Dekel Capital to talk about the strategic shift and what he is looking for in a deal.

GlobeSt.com: How have you expanded your equity capital platform?

Shlomi Ronen: We are still in the small-balance equity space, focused on $5 million to $15 million equity investments; however, we are now shifting our attention to both value-add and core-plus investments. On the value-add side, we are generally investing in older more infill properties that are getting a heavier lift than most value-add investors are doing. In the core-plus bucket, we are focusing on product will need a very light renovation and is a longer-term hold play where we can achieve low double digit IRRs on our capital.

GlobeSt.com: What was the impetus to expand your equity platform?

Shlomi Ronen: When we started out in the multifamily space, we thought there was an opportunity to provide capital to ground-up multifamily developers. Through that program, we ended up investing more than $100 million in 12 projects, all of which turned out very successful. We were able to sell or recapitalize all of those assets. With fundamentals changing, the risk reward profile of ground up development has become less appealing to us. So, we have been trying to figure out where else we can play in the multifamily space, and we are now investing in two different strategies in multifamily.

GlobeSt.com: The value-add space is competitive. What is your profile for opportunities in this space?

Ronen: We are looking at assets that will be renovated from a B- to a B+, but the property is located in an A- location. These are infill locations where people want to live, but where people have been priced out by the newer supply in the market. This product will still be at a discount to the newer supply but will feel new. These assets won’t have the amenity packages that newer properties have, but location and living space wise, it will be comparable to newer product. Plus, it will be at a price point that is more attainable for the renter population today.

GlobeSt.com: Do you continue to see pretty strong demand from equity capital for multifamily demand?

Ronen: Yes. There is still a lot of activity happening in the multifamily space. Even with the recent rise in rates, we are still seeing a lot of investment activity. We are trying to fill the small-balance equity niche that generally is bigger than what a syndicator can syndicate on their own and smaller than what a vast majority of institutional capital out there is willing to fund. Up until this point, we have really only had opportunistic capital, and now we have both value-add and core-plus capital. We think there is going to be softness in class-A, which is trying to achieve high dollar rents. We are trying to offer an alternative to those properties.

GlobeSt.com: What are your goals this year?

Ronen: We are looking to deploy between $100 million to $150 million in the next 12 months. Generally today we are using 65% leverage, and then whatever falls within that five to $15 million equity check size. All in, the sweet spot of our deal size is generally between $20 million and $50 million. We can selectively go larger than $50 million, but that all-in deal size is going to remain the sweet spot for us.