Pandemic provides buying leverage for private equity firm
When the pandemic shut down cities around the world and sparked a recession, debt funds — pools of investor money often used to make short-term loans for commercial real estate when banks will not— suddenly stopped lending.
“The market froze up,” said Michael Thompson, vice chairman of commercial real estate company CBRE’s debt and structured finance teamin Houston. “The reason for that was obviously the uncertainty in the market.”
For Houston-based private equity firm Three Pillars Capital, the freeze, which lasted roughly from March through August according to Thompson, was an opportunity. The company buys older apartment buildings and renovates them with the goal of raising rents — a business model that usually depends on debt funds that give out loans large enough, compared to the value of the building, to cover renovation costs. But because Three Pillars has an inhouse construction company, it did not need the high loan amounts and was still able to secure funding over the summer from banks, making it easier to snag apartment complexes that were on the market. It closed on two near NRG Park on Oct. 29.
“You could say that even in the midst of the pandemic and a recession, we’ve actually had our biggest year of acquisitions yet,” said Josh Welch, chief executive of Three Pillars Capital. Reduced competition from buyers who were unable to arrange financing made it seem as if therewas an un-
usual amount of property on the market, Welch said. Now Three Pillars Capital has $275 million worth of properties in its pipeline.
The company has already closed on the Mainridge, Westridge Gardens and Ridge Point apartment complexes west of NRG Park — a total of roughly 700 units — for an undisclosed amount. It plans to put in granite counters, new lighting fixtures and travertine bathroom flooring, among other upgrades, said Welch. “Our goal is to turn them around, make them like luxury apartments but at prices working-class families can afford.”
While the three buildings are in an Opportunity Zone — an area where investment is rewarded by federal tax breaks with the aim of creating jobs and spurring economic activity in low-income neighborhoods — Welch said the transaction would have occurred even without the incentive.
According to Thompson, the opportunity Three Pillars Capital and others took advantage of is coming to an end as debt funds have begun to resume lending.
“I think therewas a short window where some buyers could not execute on a transaction because of the lack of debt capital in the market,” he said. “I think that window is closing.”