New York City-based Fortress Investment Group is no stranger to dealing in distressed properties. The firm has quietly become one of the most active and powerful firms investing in the multifamily space, with over 25,000 units in its portfolio.
All told, its real estate portfolio consists of some $24 billion across 1,200 formerly distressed assets. Perhaps most notably, the firm bought the troubled 3,221-unit Parkmerced in San Francisco in 2010 for what CIO Tony Tufariello saw as a deep discount.
“This is one of those deals that was right in our wheelhouse,” said Tufariello. “We were able to control the asset at a cheap valuation and we had the expertise to restructure a complicated deal that other investors just weren’t able to."
When Fortress took over Parkmerced, it was struggling under the weight of a complex capital structure and facing dwindling occupancy from state budget cuts and weak enrollment at nearby San Francisco State University. Fast forward to today, and the complex, one of the largest communities in the western United States, is at 95 percent occupancy. Better yet, Fortress recently received the entitlements to add 5,600 new units to the site in coming years.
According to Tifariello, deals like Parkmerced represent the typical target of the firm’s credit business: distressed debt, restructuring complex capital structures, distressed securities, and rescuing loans from owners in stressed sectors. And he thinks that is precisely where the biggest opportunity is in multifamily as 2013 approaches.
“My view of the rest of 2012 and 2013 is that a significant number of recapitalization deals will go down across many asset classes,” said Tufariello. “And it’s the providers of the capital, like Fortress, that will take a substantial piece of the equity in those deals."
Fortress has made news most recently with its sale of lender CWCapital to rival Walker & Dunlop. The move made Walker & Dunlop the eighth largest commercial lender and made Fortress the company's largest shareholder. And the sale was just for the lending operations: Fortress retains the special servicing capacity of CWCapital.
"We love multifamily right now," Tufariello says. "There’s been a dramatic shift in real estate recently, and with multifamily’s improving fundamentals, we still think there are more opportunities to invest."
By the end of 2012, the company will have originated $4 billion in multifamily loans. And in January, Fortress opened a property management division, and expects to have 20,000 units in that portfolio by the end of the year. Among the growth markets Fortress is looking at for future real estate investments are New York, Chicago, and San Francisco.