Pia Residential

PIA Fund Takes Aim At Apartment Bargains

PIA Residential, a longtime investor in multifamily buildings, is amassing a war chest to buy apartment properties at discounts it expects will emerge soon.

The Miami-based shop is preparing to raise $100 million of equity from investors in Latin America for a fund known as PIA Residential Fund 1. The marketing campaign is expected to start the last week of July.

“We envision a potential correction in the multifamily market during the next 18 months, which will enable us to acquire properties at more competitive levels,” said Saul Levy, cofounder and managing partner of investments.

With leverage of up to 70%, the fund will have some $330 million in buying power. It’ll aim for a 12% to 14% return via acquisitions of value-added properties in Southeast markets.

PIA brought Luiz Henrique Lessa on board in October as a managing director of capital markets in Brazil. He raises equity throughout Latin America and will oversee the fund with managing partner Danny Kattan. As part of this strategy, the firm also wants to hire a director of acquisitions with a background
in bankruptcy to scout opportunities and build relationships with banks and special servicers. The position could be based anywhere in the Southeast or in New York.

Levy believes distress in the multifamily segment will become more pronounced by the end of the year and into 2023 as lenders become more cautious and property owners — stretched thin by rising interest rates, steep borrowing costs and tighter cashflows — are forced to sell.

“We’ve seen many owners that placed short-term debt-fund financing on their deals speeding out to market to get out from under that debt, so they don’t have to contend with the maturity,” Levy said. Some of those loans, he noted, come due in late 2022 and early 2023.

The multifamily sector already is starting to see thinner bidding pools and greater pricing pressure as the cost of debt hasincreased. As a result, some property bids are coming in 5% to 15% below expectations.

Until last week, Class-B and -C properties were taking the brunt of the lower pricing, but now there are scattered reports that Class-A properties in some markets also are starting to feel the pinch.

The shift follows years of white-hot activity in the sector. Last year, sales of apartment properties worth at least $25 million nearly tripled to a record $239.2 billion, making the multifamily sector the most active for the third year running, according to Green Street’s Sales Comps Database. Bids routinely exceeded
pricing guidance, and bidders oftentimes shelled out large nonrefundable deposits to lock in deals amid expectations that soaring rental growth would continue unabated.

At the height of the buying frenzy last year, Levy said his firm underwrote 968 properties but ended up buying only two.

Amid the fervor, the number of investors buying and flipping apartment properties at a steep markup — a tactic widely employed in the runup to the 2008 financial crisis — also shot higher. Since 2020, investors have sold 61 apartment properties worth at least $25 million within two years of buying them, according
to the Sales Comps Database. The combined value of those sales came to $6.9 billion. By comparison, there were just 13 such trades, valued at $1.3 billion, from 2018 to 2019.

Now, the cheap credit that helped fuel rampant dealmaking has vanished. The Federal Reserve has raised interest rates three times this year, including a 75-bp jump last week, and it continues to signal that more rate hikes are on the way as it tries to tamp down inflation.

“There is nowhere to hide anymore,” Levy said. “Interest rates have gone up. A few months ago, [Fannie Mae and Freddie Mac] were not able to compete, but debt funds filled that space. Now, everyone has increased prices. It’s not like you can find some silver bullet in terms of debt.”

Levy built his career taking a contrarian approach and has a history of identifying opportunities early in a cycle. During the housing downturn in 2008, Levy and his partners — brother Jimmy Levy and Kattan, their cousin — began buying distressed single-family houses and turning them into rentals. Others, including investment giants such as Blackstone, also pursued that strategy.

In 2018, PIA shifted to traditional value-added multifamily properties in the Southeast and Texas, which Levy described as “a natural progression.” Now, there’s been another “change in tempo,” he said.

“We have yet to see what happens next year with the slowdown in the economy and how that dynamic is going to work out for people that took out debt-fund money,” he said. “My sense is it’s going to get worse. We’re at a tipping point at this moment.”