Madison England Run in Fredericksburg, Va.
Madison England Run in Fredericksburg, Va.

Over the past couple of years, Equus Capital Partners has been a net seller of apartments, selling 34 properties since 2014 (9,200 units) while purchasing about 14 properties (3,800 units). But don't take that to mean that Joseph F. Mullen, president of the Madison Apartment Group, the operating arm of Equus, has soured on the apartment market or thinks the market has hit peak. In fact, it's the opposite.

"I think there's a good runway out there because of demographics, household formation, and the homeownership rate," Mullen says. "Now, will there be pockets of softness because of overbuilding? Absolutely. You'll have that on any cycle. But if you look, construction hasn't kept up with the pace of absorption. I think the fundamentals are still really good. We continue to see year-over-year healthy rent growth. As the economy gets better and household formation gets stronger, I think it all points to our favor."

Equus saw a market where buyers had more-than-ample access to capital. "The debt markets are so favorable,” Mullen says. “If we can offer a property clear to market from [an] older fund that is an analysis, we do it to see if it makes sense."

Equus isn't just opportunistic in its approach to dispositions. Whether it's buying, selling, or operating apartments, the Philadelphia-based owner of 12,000 apartment units in more than 52 multifamily communities across the country uses a flexible approach to generate value in the apartment market.

Back to Buying

In 2016, the Equus strategy should change, as it launches Fund X. "We sold a lot in the West, and we're buying in the South," says Joseph Nahas, senior vice president, institutional marketing and investor relations, at Equus. "In three to five years, we might be selling in the South and buying in the Northeast. Each fund has a strategy that looks for opportunities. Generally, if you're not buying, you're selling, and if you're not selling, you're buying."

When it does buy, Equus tries to be strategic about value-add opportunities "We prefer to go direct versus looking at broadly marketed deals, and be creative in how we do deals and how we structure deals," Nahas says.

Mullen says Equus gets a lot of deals on the rebound after other buyers fall out. "A lot of deals don't come our way and we come in third and we'll get a call," he says. "The first or second buyer went away because they couldn't get equity. We have a discretionary equity fund. We have the equity; we don't have to raise it."

Strong Investor Interest

Equus targets value-add deals. While anecdotally there's talk of increased interest in value-add opportunities, Nahas hasn't seen a huge influx of newcomers into the space. "The amount of people going after value-add apartments has probably increased, but I wouldn't say it's significantly increased," he says.

Increased interest in value-add investments means new investors are also showing interest in Equus, whose bread and butter is upgrades.

"As we raised capital for the fund, we noticed the quality of limited partners had improved because [they're] starting to have some distant memories of financial crisis and downturn," Nahas says "They're willing to take risks again. Most of the money fund in the last cycle went to core properties because it was a safer bet. We see investors moving out on [the] risk curve and looking to do value-add. And as a result, our fund-raising horizon has been accelerated in this one [fund] versus the last one."

Value-Add Focused

No doubt, investor interest in value-add investment is sparked by the returns in the sector. "There are some properties in the Equus portfolio that we can't get to fast enough to do those upgrades," Mullen says.

With the sharp rise in rental rates in Class A deals over the past five years, some renters have been priced out of the top of the market. But they still want value. That's where the Equus portfolio comes in.

"We offer a nice renovated product that's still a couple hundred bucks less than A deals," Mullen says. "We're often offering bigger units with brand new amenities and upgrades to interiors. That fits in a really nice spot in the market."

Typically, the upgrades in Madison's 20-year-old properties include new cabinets, countertops, and appliances; brushed-nickel lights and fixtures; and two-paneled doors. "We're basically bringing [the units] up to today’s standards," Mullen says.

But the biggest key to success in today's market might be what's not in the unit. "On the operating side, we're finding that the amenities are critical," Mullen says. "The days of having the tiny gym in the closet are over. People like a place to mingle and get together. We see that trend continuing. We like to provide more amenities to our residents."

The goal is to reconfigure the spaces of 20 years ago by carving out a business center, expanding gyms with new equipment, adding dog parks and dog- washing stations, and the like. "We're reconfiguring that structure to make those amenities more relative to today," Mullen says.