Recently, a couple of blind pool REITs, Pebblebrook Hotel Trust (PEB) and Retail Opportunity Investments Corp. (ROIC) have been priced and at least five more have seen S-11s filed. But the ones getting publicity haven’t been in the multifamily sector. And right now, market watchers don’t see that changing.
“Generally speaking, the bar to get a blind pool funded through the public markets is very high,” says Jeff Adler, CEO of Multifamily Indexed Equity (MFIQ), a Denver-based fund that invests in multifamily property partnerships. “I don’t think there will be many multifamily blind pools, as there are not as many multifamily assets selling at sufficiently discounted levels to cover the cost of public issuance, and there are many private companies that could go public.”
Andrew J. McCulloch, an analyst for Green Street Advisors, a Newport Beach, Calif.-based consulting and research firm, sees much of the same thing. “The allure of a blind pool REIT is that you’re saying cash is actually more than cash because you can come in and buy properties at a discount,” he says. “For Class A multifamily, there’s so much capital chasing so few deals that the story seems hard to sell.”
Paula Poskon of Robert W. Baird & Co., a Milwaukee-based wealth management, capital markets, asset management, and private equity firm, agrees. “I think we’ll see them in other sectors before multifamily,” she says. “We’ve asked our buy-side clients about their thoughts generally on blind pools, and I would say the consensus is not very favorable. Really depends on the team.”
Plus, just in general, apartments have much less return potential than other real estate sectors. “Money chasing deals today can’t really get enough of a levered return investing in the apartment sector,” says Jeffrey I. Friedman, chairman, president, and CEO of Associated Estates, an apartment REIT based in Cleveland. “The only way you can really do that is on the distressed side.”
McCulloch thinks that if blind pools lower their expectations than may be able to find some traction. “If you went further down to B or C product or secondary and tertiary markets or busted condo and busted development, you could maybe sell that,” McCulloch says. “They’re hairy deals. It’s hard to underwrite and assess the risk.”
“If there is something unique and proprietary about the investment opportunity, I think it might be possible to get a blind pool with those characteristics funded,” Adler says.
Regardless, the sentiment is that any multifamily blind REIT won’t target the cream of the crop. “If you did see one, it won’t target core product in Los Angeles, D.C., New York, or San Francisco,” McCulloch says. “It’s not a good story. You could buy the other REITs to do that.”