Pension funds are expanding the range of multifamily properties they are buying as they attempt to increase the placement of their funds in a very heated investment market.

A lot of pension funds and other cash-flush institutional investors went head-to-head with aggressive condominium converters and other multifamily specialists last year. Even as converters and local entrepreneurs were chalking up nearly $50 billion in apartment acquisitions, institutions managed to break the $10 billion barrier – literally doubling their 2004 activity, reports Real Capital Analytics (RCA).

Overall, the multifamily component of institutional real estate investments has been increasing slowly in recent years and now stands at roughly 20%, up from closer to 17% in 2002, according to the Pension Real Estate Association. Three in four pension funds are still striving to reach their real estate investment allocation targets.

Though the positive near-term outlook for apartment market fundamentals is a factor for pension funds, Craig LaFollette, senior vice president with CB Richard Ellis in Houston, suggested their aggressiveness is more reflective of the multifamily category’s proven performance over many years. “They’re generating good returns, and investors feel good about that.”

With condo conversions cooling in many markets – and with rising debt costs pressuring leveraged players – many pension funds and other capital pools are aiming to up the ante for apartment-acquisitions even more this year. Pension advisors are frequently outbidding leveraged investors for properties, but it will be very tough for their institutional clients to meet higher 2006 apartment investment goals, experts agree.

Increased institutional allocations notwithstanding, “local investors willing to take lower [going-in] yields will continue” to be competitive with them, said Scott Landress, CEO at Liquid Realty Partners, a “secondary” investment manager in San Francisco that buys and sells stakes in various commingled real estate funds on behalf of institutional clients.

Local experts can be more motivated to win these deals, due to their more intimate connection to marketplaces and relatively fewer investment alternatives, said Landress. “The tax advantages are more meaningful to them, and the alternative for many is a passbook savings account.”

Nor does Landress necessarily see higher interest rates altering the playing field in favor of cash-heavy players. Institutions and small investors both frequently tap the debt markets today, “so I’m not expecting a lot of change” in the roster of bidding war winners, he said.

Investment strategies

Focusing on leverage is one of several strategies pension funds are employing to meet their higher apartment allocations. Many are also wading into secondary markets, dealing in Class B properties and participating in “value-added” ventures.

These moves have become a matter of necessity to boost eroded yields and avoid the heaviest competition, and for many institutions it’s a matter of experience as well, said LaFollette.

Now that many institutional investors have succeeded with value-added and more modest-risk “core-plus” ventures, LaFollette is seeing greater interest in these opportunities than ever before. “The proof is in the pudding; so they’re becoming comfortable with these risks.”

Assuming debt costs continue to rise, LaFollette disagrees with Landress and expects more institutional buyers to outbid the leveraged players. Some advisors have followed through on their stated intentions to bid more aggressively for apartments over the past couple of quarters, LaFollette said.

He has seen some of the “name” advisors beating out locals in his hometown in recent months. Teachers Insurance and Annuity Association, JPMorgan Fleming and BlackRock Realty have won deals, and AEW Capital Management closed a pair of “significant” apartment purchases after a decade or more of inactivity there.

Class B gains favor with pension funds

Meanwhile, more institutional buyers have acquired Class B properties as they broaden their traditional focus on the Class A segment, New York-based RCA reports. They are also moving into secondary markets to escape the heated competition in the primary markets.

For example, Waterton Associates, a Chicago-based multifamily advisor, through its joint venture with pension giant California State Teachers Retirement System (CalSTRS), recently acquired its first property in the Portland, Ore., vicinity.

Waterton typically pursues core-plus opportunities, in which it adds value through more attentive asset management (it operates its own properties) and moderate capital investments, according to acquisitions director Rick Wise. Even its venture with CalSTRS is willing to take on leverage where appropriate; the group secured a 65% loan-to-value mortgage for its inaugural Portland-area purchase.

Wise acknowledged that it’s tough for all-cash buyers to compete, even in secondary markets with leveraged local players bidding at exceptionally low capitalization rates. The average cap rate for 2005 transactions nationwide was 6.0%, according to RCA.

Disappointing risk-adjusted yields in other asset classes help explain institutional interest in income properties, but improving apartment fundamentals are undoubtedly another factor. Indeed, many forecasts have average vacancies nationwide falling below 5% this year – and average rental rates rising 5% or more.

How to access pension fund financing

Apartment Finance Today presents this resource for finding pension fund advisors active in your market and your property type.

To access the wealth of pension fund investment targeting multifamily properties, developers need to get on the radar screens of the pension fund advisors.

Pension funds work through institutional investment advisors such as the companies listed here to acquire market-rate multifamily properties and participate in development and other value-added ventures with local entrepreneurial operators.

The number of such advisors continues to grow steadily amid continued capital flows into U.S. real estate, so this is by no means intended as a comprehensive listing. Rather, it’s a resource that apartment investors and developers can tap to learn the varying structures and strategies investment advisors are employing today. It includes some of the world’s biggest real estate investors, but also lists specialized advisors operating in the multifamily sector specifically.

AEW Capital Management, L.P.

World Trade Center East

Two Seaport Lane

Boston, MA 02210-2021

(617) 261-9000

Key multifamily contact: Robert Plumb, principal

AEW manages more than $29 billion of real estate assets and securities on behalf of institutional and private investors. Its Direct Investment Group sources new investments throughout the U.S. for a variety of separate account and commingled fund portfolios. The group frequently invests in joint ventures with proven real estate operators.

Through AEW Partners Funds, the firm sources high-return investments throughout North America through direct ownership, joint ventures and other structures. The group’s preferred investment size is $25 million to $75 million, and typical investment periods are three to seven years.

American Realty Advisors

801 N. Brand Blvd.

Glendale, CA 91203

(818) 545-1152

Key multifamily contact: Kirk Helgeson, managing director

ARA has $3 billion in assets under management and expects to close $1.2 billion in new investments in 2006. Its multifamily strategy focuses on core and value-added “middle-market” investment – that is, low- and moderate-risk investment-grade properties in or near major markets.

Core programs target Class A garden-style communities of 100 or more units that are less than 15 years old. ARA’s value-added investments typically range in size from $10 million to $100 million.

Apollo Real Estate Advisors

60 Columbus Circle

20th Floor

New York, NY 10023

(212) 515-3400

Key multifamily contact: Richard Mack, managing partner

Apollo is known as a highly opportunistic operation, with multifamily activities targeted to a great degree at large rent-controlled properties in the New York metro area. The firm has invested some $4.7 billion of equity through earlier vehicles, and has been raising another $600 million opportunity fund along with a $500 million mezzanine fund.

BlackRock Realty

40 East 52nd Street

New York, NY 10022-5911

(212) 810-5300

Key multifamily contact: Eileen Byrne, managing director

BlackRock, which acquired powerhouse SSR Realty Advisors in 2005, has more than $8 billion in real estate equity assets under management through separate accounts and both open-end and closed-end commingled funds.

Its core and value-added investments are focused primarily on top-quality properties nationwide. BlackRock’s annual investment capacity for multifamily and other primary property categories is $2.5 billion to $3.5 billion.

CB Richard Ellis Investors, LLC

865 S. Figueroa St., Suite 3500

Los Angeles, CA 90017

(213) 683-4200

Key multifamily contact: Scott Stuckman, senior managing director

After closing about $5 billion in acquisitions in 2005, CB Richard Ellis Investors now has more than $17 billion in assets under management globally, with more than half in the U.S. This includes $6.3 billion in core U.S. investments under separate account relationships.

The firm also recently raised about $1.2 billion for its latest fund, which will potentially be leveraged into $3.5 billion of investments. These are to include multifamily and other properties across the U.S. requiring repositioning and possibly development. The fund is mostly targeting coastal cities for residential investments, which will focus on Class A properties of $10 million or more.

DRA Advisors, LLC

220 E. 42nd St., 27th Floor

New York, NY 10017

(212) 697-4740

Key multifamily contact: Adam Breen, managing director

DRA manages more than $3 billion in real estate assets nationwide, conducting its investment activities through its series of commingled funds, primarily the DRA Growth and Income Funds. The latest, DRA Growth and Income Fund V, is involved in up to $1.5 billion in investments ranging from stabilized to opportunistic, including development opportunities.

DRA mostly seeks well-leased (85%-plus occupancy), garden-style or high-rise apartment properties with 200 or more units, located within strong demographic markets. Investments typically range from at least $15 million to as much as $300 million.

GE Real Estate

292 Long Ridge Road

Stamford, CT 06927

(203) 961-5400

Key multifamily contact: Frank Marro, managing director

GE focuses on strong relationships through equity partnerships with key operating partners across the country, with which the firm pursues value-added and opportunistic investments, including new development.

The company typically provides 70% to 90% of a venture’s required equity and helps arrange third-party debt amounting to leverage of 60% to 80%. GE also looks to acquire stabilized, low-risk properties valued between $10 million and $75 million, with an emphasis on large, garden-style multifamily communities.

GMAC Institutional Advisors

200 Witmer Road

Horsham, PA 19044

(800) 446-2226

Key multifamily contact: Robert Fabiszewski, managing director

This subsidiary of GMAC Commercial Mortgage Corp. has some $4.2 billion in real estate-related equity assets under management. Its Real Estate Equity Group manages portfolios for commingled funds and separate accounts, including a series of value-added funds.

The group has forged relationships with leading operating partners in major markets. Its primary strategies are core and value-added equity investments.

Heitman, LLC

191 N. Wacker Drive, Stuite 2500

Chicago, IL 60606

(312) 855-5700

Key multifamily contact: James M. Bachner, senior multifamily acquisitions officer

Heitman has more than $6.3 billion in U.S. real estate assets under management through separate accounts and commingled funds, with nearly 30% in the multifamily category. Investment activities of both funds and separate accounts focus on property-level joint ventures with public and private operating companies, possibly including new development.

The firm prefers large Class A or Class B apartment properties (garden, mid-rise and high-rise) less than 20 years old, with a minimum investment of $20 million. Management tends to focus on the 50 largest metro areas, particularly locations with strong demographics and high barriers to entry.

ING Clarion Partners

230 Park Ave.

New York, NY 10169

(212) 883-2500

Key multifamily contact: Jeffrey A. Barclay, managing director

The U.S. affiliate of the world’s largest real estate investment manager, ING Clarion has some $19 billion in private equity assets under management across the U.S. through open-end and closed-end funds and separate accounts.

Investment strategies run the yield gamut, from core to core-plus, and from value-added to opportunistic, including new development. The firm most recently raised $205 million of equity for its second opportunistic investment vehicle, ING Clarion Development Ventures II.

INVESCO Real Estate

1360 Peachtree St., N.E.

Atlanta, GA 30309

(404) 439-3450

Key multifamily contact: Max Swango, partner

INVESCO manages about $9.1 billion in U.S. directly owned real estate assets on behalf of separate-account institutional clients. It targets core and value-added investments in major markets, and it will consider assuming existing debt in addition to all-cash transactions.

Minimum multifamily deal sizes are $10 million and 100 units, focused on both Class A and Class B garden and mid-rise properties in strong locations. The firm considers post-1990 construction for core investments, with minimum occupancy of 80%. It has no age or occupancy restrictions for value-added deals.

Kennedy Associates Real Estate Counsel, Inc.

1215 Fourth Ave.

2400 Financial Center

Seattle, WA 98161

(206) 623-4739

Key multifamily contact: David Antonelli, senior vice president

Kennedy Associates is investment advisor to 12 separate- account clients and three commingled funds on behalf of 250-plus institutional investors, for a total of about $7.5 billion in assets under management.

The firm prefers development or rehabilitation of upscale, mid- to high-rise apartment projects in markets that are supply-constrained primarily due to significant barriers to entry. Kennedy seeks investments of $10 million or more in about 30 major markets across the country.

Kensington Realty Advisors, Inc.

100 North Riverside Plaza Suite 2300

Chicago, IL 60606

(312) 993-7800

Key multifamily contact: James Smith, managing principal

Kensington conducts its institutional and corporate multifamily investment management primarily through Kensington/Marquette Partners LLC (KMP – a venture with property manager Marquette Management Inc.) and KMF Senior Housing Investors LLC. The former focuses on major central U.S. markets, with the seniors housing group operating nationwide.

The KMP venture seeks Class A and Class B garden-style, mid-rise or high-rise properties of 250-plus units, valued at $15 million or more and completed since 1980. It prefers 90%-plus occupancies, but will consider value-added and development opportunities in some instances.

Morgan Stanley Real Estate

1585 Broadway

New York, NY 10036

(212) 761-4000

Key multifamily contact: Sonny Kalsi, managing director

Morgan Stanley’s real estate investment management operation has some $38 billion of assets under management in the U.S., Europe and Asia through open- and closed-end commingled funds, mutual funds and separate accounts.

Four of the six widely recognized funds the firm has launched over the last 15 years are focused on U.S. opportunities. Strategies range from core to opportunistic.

Principal Real Estate Investors

801 Grand Ave.

Des Moines, IA 50392-0490

(800) 533-1390

Key multifamily contact: Rod Vogel, managing director

The division of Principal Financial Group’s Principal Global Investors has nearly $32 billion in assets under management, including $8 billion in private equity. Apartments comprise about 23% of the group’s portfolio.

Principal’s more than 180 real estate investment professionals focus on about 60 major markets across the country, but they will consider others on a case-by-case basis. They seek Class A and Class B properties of 125 or more units, with a minimum investment of $10 million. In addition to core investments, Principal considers development ventures and pre-sales.

Prudential Real Estate Investors

8 Campus Drive

Parsippany, NJ 07054

(973) 734-1300

Key multifamily contact: Dale Taysom, managing director

Industry stalwart PREI has some $15.5 billion in U.S. assets under management via open- and closed-end commingled funds and individually managed separate accounts. The vast bulk of PREI-managed capital is invested through local operators and developers in value-added ventures.

The firm employs diversified core real estate equity and private debt strategies, value-added real estate equity strategies, and opportunistic or specialized private or public real estate equity strategies.

RREEF North America

875 N. Michigan Ave., 41st Floor

Chicago, IL 60611

(312) 266-9300

Key multifamily contact: Timothy E. Ellsworth, managing director

RREEF now has some $27.5 billion in assets under management in core and value-added private investment vehicles. The firm is actively expanding its multifamily portfolio, which already exceeds 18,000 units in about 30 major markets across the country.

Management targets high-quality, suburban garden-type communities of 150 units or more that are less than 15 years old. It also seeks opportunities to add value through physical or management repositioning.

Sentinel Real Estate Corp.

1251 Avenue of the Americas, 35th Floor

New York NY 10020

(212) 408-5000

Key multifamily contact: David Weiner, managing director

Sentinel is the nation’s largest owner and manager of multifamily properties on behalf of tax-exempt investors, managing more than $5 billion in real estate assets. The firm oversees 63,000 residential units, employing more than 2,000 people throughout the U.S.

The Tuckerman Group

10 S. Wacker Drive, Suite 3250

Chicago, IL 60606

(312) 798-6507

Key multifamily contact: Glen Weisberg

Owned by State Street Global Advisors and Dutch pension fund ABP, Tuckerman’s direct investment advisory activities include a substantial multifamily merchant development program conducted through local partners across the country.

The focus is primarily on large, high-end garden-style apartment developments. But management is interested in pursuing substantial renovation and redevelopment ventures as well.

UBS Realty Advisors

242 Trumbull St.

Hartford, CT 06103-1212

(860) 616-9000

Key multifamily contact: Matthew Lynch, managing director

The UBS team offers a variety of investment structures and targets a number of real estate ventures. It buys core properties outright on behalf of institutional clients, and also pursues joint ventures for value-added and development programs.

Management considers all configurations of multifamily properties of 150 or more units, with the minimum investment at $5 million. It focuses on post-1985 construction with a minimum occupancy rate of 80%. Markets with stable or growing populations are preferred, as are properties along major thoroughfares.

Urdang Capital Management

630 W. Germantown Pike, Suite 300

Plymouth Meeting, PA 19462

(610) 834-9500

Key multifamily contact: Scott Coopchik, national director of acquisitions

Urdang’s assets under management include more than 90 properties in the major categories nationwide valued at about $1.9 billion. Annual investment activity, including modest leverage, is typically between $300 million and $500 million.

The firm targets multifamily properties of more than 200 units, ranging from core Class A to Class B with modest improvement needs to Class C in need of substantial renovation in solid infill locations. Developments are considered in select situations.

Waterton Associates LLC

One N. Franklin, Suite 1150

Chicago, IL 60606

(312) 948-4500

Key multifamily contact: Rick Wise, director of acquisitions

This apartment specialist typically teams with its institutional partner clients to acquire strategically located Class B properties of 200 or more units in high barrier-to-entry submarkets. The firm aims to increase value through repositioning, but it will also acquire Class A communities where available at below-replacement costs.