While other potential buyers argued with sellers about the prices of apartment properties, Harbor Group International (HGI) put billions to work for its investors. HGI invested $2.7 billion to buy apartment properties in 2022. Rising interest rates barely slowed them down.
The real estate investment firm, headquartered in Norfolk, Va., is finding property owners motivated to sell, even if they have to accept higher cap rates to adjust for higher interest rates. HGI also uses strong lender relationships to find relatively low interest rates, sometimes by assuming existing loans on apartment properties.
“We're in the market buying,” says Yisroel Berg, HGI’s chief investment officer for multifamily. “We believe they're there will continue to be opportunities.”
We asked Berg how HGI is finding attractive opportunities when so many other firms are unable to close deals. Edna Chen, senior vice president of investor also shared how HGI’s investors are changing.
This interview has been edited for style, length and clarity.
WMRE: Can you outline your overall goals with your investments?
Yisroel Berg: Our primary objective is to buy strong multifamily, with good underlying fundamentals. That may take the form of a value-add play, [though in recent years] traditional value-add had gotten a little bit heated.
That spread between the bid and the ask is still pretty wide. Brokers are having a difficult time getting sellers totally on board with where the market is right now on the pricing side.
We closed two loan assumptions in December—including one in Connecticut. Volatility for the transaction process limited the pool of potential buyers and gave us some opportunity to use our brand name and HGI’s ability to execute. We are a top five borrower with Freddie Mac. We can present a story that this loan will be assumed and that risk is effectively off the table. So they're going to go with us more so than the next guy. The Pavillions is 936 units in Manchester, Conn. We negotiated it in probably the beginning of the fourth quarter and we closed December 27th.
Sometimes, we'll be buying brand new product that's in lease up—we believe we're buying at a discount for taking some of the lease up risk. [For example, in 2022] our signature purchase was the ParkLine Miami, which you know is maybe one of the nicest multifamily deals, certainly in the Southeast.
Towards the second half of the year we were able to find some really good opportunities. We bought a deal in in L.A. in Koreatown for $200 million-plus. That was more of a situation with a motivated seller that had a loan due and candidly was taking a loss on the deal. You just have to kind of get creative to find value—whether a developer has a construction loan that's due or some higher-cost debt that that that starting to burn, given the blowout in in interest rates.
Within our 60,000 units we own really everything, major markets and secondary markets, high rises and in Miami and, as I mentioned, in L.A.’s Koreatown. We also own the garden-style product and workforce housing, single-story product.
WMRE: How does the $2.7 billion in properties that you bought in 2022 compare to prior years?
Yisroel Berg: The year prior [2021] we were a little bit over $3 billion . We actually called it “The Year of the Portfolio,” most notably a $1 billion portfolio in New Jersey we might have called the Garden State Portfolio.
WMRE: How would you characterize your investors?
Edna Chen: Harbor Group International’s investor base is comprised of high-net-worth individuals, family offices, wealth management firms, endowments, foundations and institutional investors globally.
Investors can invest through a variety of investment solutions including closed-end fund structures, separately managed accounts, and direct participation in investments. Our focus has been on matching the right capital with the right investment opportunities and durations. Minimum investment commitments vary by investment.
WMRE: How are your conversations with current or potential investors changing given the state of the market?
Edna Chen: We believe that investors are optimistic about the opportunities we expect to identify in the year ahead. Over our 38-year history, HGI has a track record of capitalizing on opportunities during times of market dislocation, including the real estate crash of the early 1990s, a dotcom bubble bust, the Great Recession and a global pandemic. We owe this success to the unique combination of our diversified investment platform, our experienced senior management team that has worked together for 20-plus years and our deep reserves of actionable market data.
Today’s market environment is one of the most significant periods in HGI’s history. The landscape has changed swiftly. Interest rates and inflation are at rates not seen in decades, and the economic and political climates are fraught with uncertainty. We believe that these volatile times play to HGI’s historical strengths.
WMRE: What reporting do investors demand? How is that changing?
Edna Chen: We provide a full range of reporting to our investors as well as periodic updates through our annual reports, communications, and year-end conference as well as meetings and conference calls.
WMRE: How is raising capital for your funds changing? What yields have you historically delivered to investors?
Edna Chen: HGI’s ability to work with a diverse universe of investors has been a key component of our ability to raise capital in all market conditions. Our investors have direct relationships with our equity and IR teams as well as access to our senior partners. This led to 2022 being a record year for capital raised within HGI. Performance information is confidential, but we are proud of our record as an industry leader with the size, scope, and deal-making capabilities that puts us among a group of few competitors.
WMRE: In 2022, did you see sell many properties?
Yisroel Berg: We did have a really active year last year on the sales side. [Though] we actually were a net buyer, it was a banner year for us on the sales side. We were in a low cap rate environment particularly in the first portion of the year. I think it was the highest amount of sales we have ever had.
WMRE: As interest rates rose, did potential buyers try and re-trade you?
Yisroel Berg: Re-trading was part of the market. Thankfully we went out early enough. We were able to get people hard on contract before that became too relevant.
WMRE: How long do you hold these properties?
Yisroel Berg: Our average hold is about five years. That's not to say we won't hold longer or shorter. Particularly when we buy these portfolios the idea is always to kind of sell off some of these early.
WMRE: What's your longest hold?
Yisroel Berg: We have had assets over the Great Financial Crisis that we owned a little bit over 10 years, but that's the maximum debt we put on a property: 10 years.
WMRE: Do you figure this year to be a net seller or a net buyer?
Yisroel Berg: I would think we would be a net buyer again. The supply that's actually on the market is less than maybe normal but there will continue to be opportunities where there are some forced sellers by nature of the higher-leverage bridge loans that they have.