Alexandria, Va.-based AvalonBay Communities recently closed on a $400 million equity fund that will target value-add acquisitions. The fund, which can be leveraged up to 65 percent, allows for a total investment capacity of $1.1 billion.

This is the second (and final) closing of the AvalonBay Value-Added Fund II. It was initially closed last August, but the company was since able to grow the fund by attracting a new investor that pledged $75 million, as well as receiving an additional $17 million from an existing investor.

The company's first value-add fund netted 20 apartment communities, representing about $800 million in total investment costs. This fund will follow the same strategy as the first, targeting a diverse mix of communities—new and old, suburban and urban, garden and high-rise—in AvalonBay's existing markets.

As a value-add fund, the strategy focuses on redevelopment, improved operations, and market-cycle timing. "But the market environment is a bit different this time around," notes Kevin O'Shea, the firm's senior vice president of investment management. "Although the focus will remain on redevelopment and improved operations, market-cycle opportunities this time around may include acquisitions where an attractive price can be achieved due to stress in the market."

Additionally, the company might consider acquiring other distressed assets such as failed condo deals that could be flipped into rentals. "We think the next couple of years will represent an interesting period to invest in apartment acquisitions," O'Shea says.

The investor interest in the fund is welcome news for the multifamily industry, as many opportunity funds formed in the past few years have increasingly seen investor commitments pulled.

"In the current environment, you look at this as a positive sign—that with recent value declines, many investors are realizing you can make attractive long-term returns in apartments today," O'Shea says. "We're looking at higher entry yields than over the previous several-year period."

The fund takes on greater importance for the company in today's economic climate. Like most of the big REITs, AvalonBay has significantly reduced its ground-up development pipeline this year. For instance, the company halted work on two new projects in Chicago earlier this year—a 1,000-unit development in the South Loop as well as a joint venture mixed-use community in Oak Park, Ill. The deals would've been the company's first foray into new development in a noncoastal market.

But AvalonBay is still interested in Chicago and may use the current value-add fund to invest there. The company broke into Chicago in 1998 and owns five developments there totaling nearly 1,300 units that it has acquired over the years.

The company has been shoring up its capital structure as of late, recently striking a tentative deal to mortgage 14 of its communities through Freddie Mac financing for a total of $741.1 million.

Though the fund has essentially been in place since last August, the company has not yet closed on any transactions. AvalonBay is proceeding cautiously, not wanting to jump in too soon, as the market re-prices risk.

"We knew we were in a changing environment with respect to cap rates," O'Shea said. "You only get one chance to invest your capital."