GREENSBORO, NC—Bell Partners just closed on its seventh apartment fund. At $950 million, it was oversubscribed from its $800 million target and with leverage added it has $2.5 billion in purchasing power.
It's a value-add strategy fund focusing on market-rate apartments in 14 markets across the US. The fund plans to add value in part by capitalizing on price dislocations. At this particular and peculiar point in the market, price dislocation might refer to distress opportunities but that is not what Bell Partners has in mind. Rather the fund, which began its marketing early last year, is targeting more typical value-add opportunities, according to president Lili Dunn.
"When we say price dislocation we are referring to acquiring a property at a favorable basis," Dunn tells GlobeSt.com. "That means solving a problem that is difficult for others to do and getting appropriate risk adjusted returns for doing so."
But the fund is not dismissing distress opportunities out of hand completely. There can be good deals to be had when an owner is in distress and not necessarily the property, CEO Jon Bell tells GlobeSt.com. But an apartment with distressed cash flows—that is, with a large number of tenants not paying their rent? "We would have to look hard at the asset and underwrite the near-term effects to make sure we price appropriately, Dunn says.
Bell is not so sure that distress is an appropriate investment target anyway, despite the dizzying level of dry powder that has accumulated with this goal in mind.
"On the disposition side, sellers don't have a big appetite to react to distress pricing yet," he says, noting that such assets being marketed right now are at just a 5% discount. Buyers, meanwhile, talk about 10% to 20% discounts. "I suspect there will be a disconnect for a while."
But the firm has been approached by buyers that are interested in quality deals, he reports. "They are talking about prices that are above our internal mark," he says.
"We think there will be a flight to quality once deals resume."
So far the company has secured broker opinions of value for three possible deals and in other cases it has restarted its marketing process. Nothing formal has been signed, Bell says, "but based on the pricing we are talking about we may consider moving forward."
The pricing is at pre-COVID-19 levels and the deals range in size from $50 million to $100 million, Dunn says. "These are well known, well capitalized national and international buyers that have expressed strong interest," she says.
It's an interesting turn of events, Bell observes. For the last few years of this market cycle, buyers have been chasing yield by targeting lower-quality assets to get higher returns. That is where the stress is right now, he says—those properties acquired by investors that were chasing yield. "We stuck to our strategy by not chasing yield and it is paying off for us now."
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
