March 30, 2015

Realty investors flock afresh to apt., retail pools

PHOTO | Contributed
PHOTO | Contributed
Hamilton Point’s David Kelsey, left, and Matthew Sharp.
PHOTO | Contributed
Brad Hutensky
PHOTO | Contributed
Before view of Hutensky's fund’s Richmond, Va., retail site.
PHOTO | Contributed
After view of Hutensky's fund’s Richmond, Va., retail site.

Chastened by the most recent real estate collapse but hungry for better returns, investors across Connecticut and the U.S. are pumping money into new investment pools that are buying up commercial properties mostly outside this state.

Since January, Hutensky Capital Partners and Talcott Realty Partners, both in Hartford, and Hamilton Point Investments in Old Lyme have joined the raft of U.S. investment sponsors launching multi-million-dollar funds to buy everything from apartment buildings and shopping centers to office and industrial buildings.

The Hutensky Group unit has launched another $100 million fund — its fourth in the last 15 years — to invest strictly in building or buying and renovating/repositioning retail shopping centers in U.S. markets with population and job growth, Managing Partner Brad Hutensky said. It recently closed a third fund after raising $117 million — $17 million more than its goal.

Hamilton Point, at the end of last year, closed on its third investment fund, raising $81 million. In February, it began soliciting accredited, high net-worth investors for its fourth fund, this one aiming to raise $100 million to buy and operate older, existing apartments in the southeastern U.S. Many investors in both funds subscribed to Hamilton's earlier investment portfolios, said Hamilton Point Principal Matthew Sharp.

"Investors are worried the stock market feels too expensive," Sharp said. "And a lot of them can't get good [investment] yields elsewhere.''

Talcott Realty Partners, co-owner of downtown Hartford's iconic Gold Building, which is about to go on the sales block, also has just opened a fund, said President Michael Mihalek. Talcott's goal is to raise $250 million by summer's end to invest primarily in "high-growth'' suburban office space markets such as in Denver; Phoenix; Nashville, Tenn.; Austin and San Antonio, Texas, among others.

"We feel the time is right in the cycle to invest in a value-add strategy,'' Mihalek said.

Although each Connecticut investment fund is chasing after different property types they do share one thing in common: They don't have Nutmeg State properties on their investment radar, instead preferring to place bets in cities and communities that have higher growth potential.

According to British data-tracker Preqin, commercial real estate investing worldwide peaked in 2008, the same year the global financial crisis emerged, with 204 funds raising $108.2 billion. Since then, fundings have steadily crept back up, from a low of 111 funds that drew $35.7 billion in 2009, to 168 totaling $78.8 billion in 2013, Preqin data shows. So far this year, Preqin counts 16 funds that have raised $12.4 billion.

Timing for investing in retail and multi-family real estate also couldn't be better, says Michael Riccio, a CBRE-New England senior managing partner with deep experience with investors to raise or borrow capital to build or buy properties.

Driving the steady climb in realty investments are the opportunities generated during and after the Great Recession, a period in which many landlords were left with empty office space and storefronts. Faced with insufficient cash flows and properties whose mortgages exceeded their underlying values, landlords and their realty investors either lost properties to foreclosure or were stuck with them.

"In the case of retail, that's the last property type to come out of recession,'' Riccio said. "The upside on retail is great in this time of the cycle."

By contrast, apartments recovered very early into the recession cycle as over-mortgaged homeowners either chose, or were forced, to rent. Investing to build new or refurbish existing multi-family properties remains strong and "we still see that has some legs,'' Riccio said.

Greg MacKinnon, research director at the Pension Real Estate Association, whose members include pensions, real estate investment trusts, insurers, developers, landlords and investment advisors, among others, said capital flows into real estate "dried up in large part" during the recession. But in the last few years they have come back plenty.

Investors now realize, MacKinnon said, that while investment in real estate suffered the last recession, "… portfolios that were properly set didn't do too badly relative to stock and bond markets and other kinds of investments.

It is the best-performing office, retail and multi-family properties, or at least ones with the potential to yield strong returns, that Hutensky, Hamilton Point and Talcott officials say they and their investors covet.

With proceeds from its third retail-realty investment fund, The Hutensky Group invested in eight properties: half in new retail construction; the rest used to buy and reposition older assets.

One of those was the former Cloverleaf Mall in Richmond, Va., once that city's and state's biggest enclosed malls when it opened in 1972. But Cloverleaf's cachet faded over the years, a victim of newer, bigger suburban malls that sprouted throughout the region and changed shopper habits.

Hutensky's investors bought and razed the mall, erecting a smaller retail center on the site. Undeveloped adjoining acreage on the site has been sold to others who plan a 600-unit apartment complex and other amenities.

"This whole area has really transformed,'' Hutensky said, pointing to "before" and "after" photos of the Cloverleaf site.

Hutensky Capital's third fund already has invested in a Chicago retail property and another with "good bones'' in suburban Cleveland, Ohio. Two more deals are in the works, with the fund on track to buy and invest in a total of 10 properties over the next three years, Hutensky said.

The plan for both, he said, is to use Hutensky Group's retail development and management expertise and dollar to make improvements to the properties' common areas and tenant spaces to boost occupancies.

Hamilton Point, meanwhile, hunts for apartment properties that it can acquire for as far below the prevailing $120,000 per unit replacement cost for multi-family housing, Sharp said.

For illustration, he said paying $80,000 per unit for an apartment complex means it is more likely to generate a profitable return, rather than a loss, for his investors.

"Investors like that thesis,'' Sharp said. Hamilton Point investors in 2014 sold their stake in 129 apartments and adjoining office-retail space in The Bushnell On The Park in downtown Hartford.

Proceeds from Talcott Realty's fourth investment fund will buy between 18 and 25 office properties at average $30 million apiece, Mihalek said.

One major difference in how Talcott proceeds in this current investment cycle is that it "will be much more focused on our specific target markets,'' he said.

Connecticut's investment fund promoters say the cataclysmic drop in commercial and residential values during the Great Recession has generated noticeable changes in the way investors view and approach real estate. Operators say they even welcome the changes.

"They dig very deep into who the sponsor is, which may not have been the case 10 years ago,'' Sharp said.

Hutensky agrees.

"It's still a time when people are still asking questions, even people who know you well,'' he said. "I think it's to their credit. I want them to.''

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