It seems that more and more funds and platforms are launching every day to take advantage of the current dislocation in the real estate capitals market. The latest venture to join the trend is Alpaca Real Estate (ARE)—an offshoot of New York City-based alternative investment management firm Alpaca that will focus on recapitalization, repositioning, strategic capital infusions and physical transformation opportunities primarily involving infill industrial and build-to-rent properties. The platform also aims to use technology and innovative operating platforms to create cost efficiencies and generate additional returns from its real estate assets.
ARE is being led by seasoned private equity real estate professionals Daniel Carr and Peter Weiss. Carr previously served as principal, real estate, with Ares Management. Weiss had helped launch private equity real estate firm Prospect Ridge in 2019, and before that, worked at AllianceBernstein.
ARE is being anchored by capital provided by GCM Grosvenor, a global alternative asset management solutions provider. In addition, the firm is working with both domestic and international institutional investors, wealth management firms and family offices.
WMRE recently talked to Carr and Weiss about their vision for the new platform, how investors are responding to real estate opportunities in today’s complicated market and how they plan to use technology to drive higher returns from their real estate assets.
This Q&A has been edited for length, style and clarity.
WMRE: The press release announcing the launch of ARE mentions this new platform will be anchored by capital from GCM Grosvenor. Can you tell me how much capital they will be providing and what attracted them to this platform?
Daniel Carr: We can’t disclose exactly how much capital they will be providing, but we can certainly talk about what attracted them to the platform. In general, Alpaca Real Estate is a private equity fund manager and GCM is supporting our funds, they are the anchor capital in the funds. They are attracted to us because we are doing something different that other private equity real estate managers are not. And what that is we are bridging the gap between innovation in technology, climate technology and traditional real estate strategies.
Peter and I have 10-year track records—I was at Ares Management, Peter was at Prospect Ridge, we’ve got a huge traditional real estate background. But what we are doing is we are utilizing all the knowledge and relationships from Alpaca VC, which is a venture capital part of our company that’s invested in over 100 companies, to bring innovation to those traditional real estate assets. That’s something that other managers aren’t doing and that’s why we were able to garner the support of GCM and their investment managers.
WMRE: We will come back a little later to the innovation and technology part. I also wanted to ask what other types of equity investors are you pursuing or have signed up for this platform?
Daniel Carr: The stable today is institutional U.S. We are also pursing U.S. wealth management and family office, as well as international institutional and international wealth management and family office.
WMRE: How are you reaching out to those investors—the wealth management firms and family offices? And how much interest are they showing in this venture?
Daniel Carr: We are reaching out to them in a number of ways. We are having events in various cities around the country. We just had a 100-person event in New York, that was really well-attended. We plan to be doing the same in other cities around U.S. In terms of how it’s been received, it’s been received very well, very favorably, and the reason is that many managers today, the traditional real estate manager is bogged down in their own portfolio in asset management and resolving their issues. Because we are a new venture, we are able to be only forward-thinking. And I think that really appealed to this channel. When they think about what their manager is spending time on, we are spending 100% of our time looking for deals, and also thinking about how we can be innovative in our real estate practice. It’s quiet different from managers who might be figuring out the problems in their portfolio, which assets to protect, which loans to give back to the bank.
WMRE: Can you tell me how much money you are aiming to raise at this point?
Daniel Carr: We can’t disclose the exact amount because of solicitation reasons. But I can say that our intent is to raise a mid-market private equity fund, and many of those over the next 20-plus years. Mid-market private equity is typically in the $500 million fund range.
WMRE: One more question on the wealth management firms/family office side. How will you be structuring your partnerships with those types of investors?
Daniel Carr: The easiest way and the most common way will be through a traditional closed-end private equity fund vehicle. For larger investors, we are structuring separate account arrangements. But that typically is not within the wealth management or family office channel.
WMRE: Let’s talk about your investment strategy. The press release mentions that you plan to focus on sectors that have been negatively impacted by the current dearth of capital availability, but have strong underlying fundamentals. Can you give some more concrete details about which sectors you are planning to play in?
Peter Weiss: One of our big focus points is being highly thematic in terms of how we approach investment and that process for us starts with writing white papers in terms of market-mapping asset classes. And so the two that we are most focused on today are infill industrial and build-to-rent within the residential sector. I’ll start with infill industrial and what we like about it is that within that asset class vacancies are at historic lows and you can’t really add supply because there are natural barriers to entry given the locations of these warehouses. And so what we found is that not only is there a considerable mark-to-market within existing rent rolls, but also, because the leasing market is so tight, there’s a lot of going-forward rent growth.
And within the residential sector, we’ve spent time on build-to-rent. And the reason that we like build-to-rent within the single-family rental is that the going-in yields today are wider than what we are seeing in multifamily development. And similarly, the forward rent [prospect] is close to double multifamily rent growth. And so not only are you starting from a higher entry point, but you are also capitalizing on more forward growth, which allows us to create a higher octane return. And at the same time, have the same kick-out financing from the agencies. So your downside is protected from that regard. And at the end of the day, you own a property with brand new single-family homes.
One thing I do want to mention is that a big part of our edge or angle at Alpaca is integrating innovative operating platforms. Dan mentioned upfront that innovation is a big theme and lever that we have that leads to alpha generation. And within each of those asset classes, where we’ve underwritten and researched that the real estate itself we think will outperform, we are also overlaying operating platforms that we think can generate additional returns. The example in the industrial space is EV charging and the example in the residential space is rent-to-own as two examples of operating platforms that we believe generate additional returns for what’s already really strong operating real estate.
WMRE: We’ve definitely been hearing that EV charging is a big thing in industrial right now, that it’s a big growth area.
Daniel Carr: It’s new, right? Many people in real estate are not focused on it. But at Alpaca, we’ve actually already invested in an EV charging company and so we get so much knowledge and information about how to actually do that, how to effectuate investments in EV charging assets through that knowledge base. I think it is yet to be broadly adopted, so we intend to be an early mover in that category.
Peter Weiss: One other thing that I would mention specific to EV charging is that our partners on the venture side have made investments into EV charging innovators. So we get direct insight into the growth of those businesses, which helps us make better decisions into the real estate.
WMRE: Have you closed on or currently pursuing any deals you can give us examples of?
Peter Weiss: On the deal side, we can certainly walk you through examples and case studies that we are diligencing. I’ll give you two examples. I’ll start with a BTR example. Within BTR, a focus of ours is to work with existing relationships and define infill land where our view is the demographics are incredibly strong. What we are targeting is we are targeting locations where they could be for sale or for rent, but there isn’t for-rent competition across the street. So, while it underwrites with a slight rent premium, it’s very much a location premium, so the big part of the amenity of the community is the location. We’ve spent a lot of time in the Southeast generally, we’ve spent time in Southwest Florida specifically. And there are a handful of deals that are currently in the pipeline that we are focused on. As I mentioned, I would say that the key components are owned land with partners we’ve known for a long time and trust, yield profiles that are on today’s rent are north of 6.5% and going up, underwritten rent that we think because of a supply/demand shortage is north of 4.0%, so you are stabilizing in the mid-7s. And a very high quality of overall home, with around or north of 100 homes per community.
We are then working with the rent-to-own operators that I mentioned. So, what I just walked through is the real estate underwriting. But when we layer on top rent-to-own, we think there’s an opportunity for additional yield on top of the base real estate returns.
Similarly, in the industrial space, we are looking at infill warehouses in Austin, Nashville, Atlanta and also Florida markets. We are looking at sites that are within 30 minutes of the center of the MSA. Sub-300,000 sq. ft. and similarly stabilizing north of a 7%. With all of those business plans, we are focused on how can we create excess return, either through bringing additional power to the site or through working with some existing relationships in the co-warehousing space where we can generate additional yield through tenancy.
We continue to look at other asset classes as well, with the consistent themes being very strong operating fundamentals and some semblance of capital markets disarray. And with the 10-year north of 4.75%, what we are finding is more and more that being a liquidity provider at this time is incredibly valuable.
WMRE: It sounds like you are not having trouble finding attractive opportunities in this market?
Peter Weiss: What I would say is we have a very robust pipeline and we are being cautious in how we underwrite it and where we engage, given the macro environment. But there’s no lack of deals.
Daniel Carr: One thing that we are able to do, which has been so gratifying, is take all of the relationships generated through our past couple of decades of experience investing in real estate and be a solutions provider. Right now, there’s capital markets dislocation. Many large investors are on the sidelines. That gives us the opportunity to work with best-in-class developers, buy in limited bid auction processes and , overall, get a great basis to high quality assets. That’s harder for an emerging firm to do in a very bull market. But given the capital markets dislocation today, there are a lot of opportunities that are presenting themselves now and I think are going to continue to present themselves as we have ongoing volatility over 2024.
WMRE: You did mention innovation earlier and the press release did mention you plan to use of technology to help drive cost efficiencies and drive up returns? Can we delve a little bit more into that?
Peter Weiss: There are really two key ways that we are being innovative as a platform. The first is the conversation we’ve been having that’s really by our knowledge advantage in terms of how we are integrating innovative operating platforms through that knowledge advantage with Alpaca Venture Capital. And that’s what led to our ability to overlay EV charging and investment there, co-warehousing, where they have really deep relationships with the top operators. So that allows us to potentially acquire assets with a tenant, and rent-to-own and short-term rentals. So a lot of these, which historically might have been grouped into proptech, the way we look at them is these are innovative operating platforms that, while some are institutionally accepted, they aren’t institutionally underwritten. And so as they create excess value and outcome we could be at the leading edge in capitalizing on that for our investors.
And then way number two is we are building out our own internal data process and warehouse that allows us to make value decisions in a more efficient way. That’s really an internal technology process that’s important to Dan and I as we build up a team and build our data lake. And everything else is on the table as well, in terms of other ways that we can drive excess revenue and/or expense savings from the myriad of technologies that are out there that we think are foundational to property management. For example, a lot of technologies, whether it be Yardi or CoStar, all of those lists of technology firms that have grown over the last five years, we believe we get the benefit of, just like everyone else does. And we think those technologies are foundational to how real estate owners make decisions today, which is why we are 100% focused on innovative technologies and innovative operating platforms that we think they can generate additional alpha.
WMRE: A big part of the thesis of the platform is taking advantage of the capital dislocation in today’s market and Daniel mentioned that you expect this to continue at least into 2024. Do you have longer-term visibility? How long do you think this period will last?
Peter Weiss: That’s the trillion-dollar question. What we do know is that the 10-year was in the threes in May and it’s now at 4.75%. What everyone was hoping would happen—and by everyone, I mean institutional real estate investors—was that rates would come down. Earlier this year, as people were building their budgets for 2023, the forward curve showed rate reduction in Q4. And what that meant was that a lot of borrowers that had borrowed floating-rate debt at really low rates that needed to refinance in 2024-2025, those refinance rates looked a lot better for them than in the first half of this year.
Because that’s no longer the forecast, if we can trust the forward curve (which is always wrong, but that’s what we are using as a basis for where we think things are headed), what it means is those refinances aren’t going to happen. Therefore, there are going to be more difficult decisions that arise within real commercial real estate, even within asset classes that have strong operating fundamentals. And as those difficult decisions start to percolate, whether it’s buying an interest rate cap, whether it’s needing liquidity for somewhere else in your portfolio, whether it is a sale decision or a refinance decision, eventually more robust trades will occur. And for us as a new platform with capital and no legacy asset management issues, we’ll be able to capitalize on that.
WMRE: Is there anything else that we haven’t talked about that you think is important to mention?
Daniel Carr: The one point to make is in our strategy the preponderance of returns is generated from the underlying real estate strategy. So real estate underwriting comes first, and then the alpha comes from the innovation and integrating technology and climate operating platforms. So that’s an important thing that we’d like folks to understand. The downside return is your typical real estate return, which right now looks pretty good, and then the upside is through innovation.
Peter Weiss: And what I think has been appreciated as we’ve spoken to investors is when we walk investors through the strategy, we can actually walk them through case studies on each one of those innovating operating platforms where we have a base real estate deal, such as BTR and infill industrial that, between Dan and I, we’ve underwritten and we can compare it to a hundred other deals that we’ve underwritten that we would want to pursue as a real estate deal. And then we can walk through the math and the market math of that innovating operating platform and what that scenario looks like. And if it’s EV charging as an example, we have an existing operating business that our partners are invested in that we have a direct line and perfect information into how it works and who to execute with.
WMRE: Just given where the commercial real estate market is right now and a lot of the negative press it’s been getting, across the various investor types, when you are talking to them, are people concerned about putting their money into real estate right now? Does it take a little bit more convincing?
Daniel Carr: I think there’s a general understanding today that buying real estate going forward at reset valuation should yield good returns. This is the definition of a buy low-sell high strategy where now is the time to start to look for assets and get in because values have corrected in some cases upward of 20%. So explaining that, showing historical data around coming out of prior real estate downturns, and that fund vintages that have originated coming out of downturns have typically done quite well has got people very excited about the prospects for investment today as compared to worrying about the general state of the real estate market.
Peter Weiss: I think when you pair that with Dan and mine within real estate investing, combined with Alpaca’s pedigree in innovation, it provides a pretty unique product that these groups are excited about, especially as we are going into what we believe is the next cycle.