Berkadia’s Chinmay Bhatt and Noam Franklin On Momentum for Equity in CRE
Berkadia‘s joint venture equity and structured capital team has found a niche in the capital stack that has kept it extra busy this year.
The platform, led by Chinmay Bhatt and Noam Franklin, focuses exclusively on sourcing equity to close deals. The strategy has proved advantageous amid debt markets freezing up from rising interest rates and a regional banking crisis that pushed more traditional lenders to the sidelines.
Bhatt is based in New York, while Franklin works out of Berkadia’s Miami office. The brokerage duo spoke to Commercial Observer about the increased demand for equity this year, Berkadia’s overseas alliance with Knight Frank, prospects for foreign capital investments in commercial real estate deals, and international interest in student housing transactions.
The discussion has been edited for length and clarity.
Commercial Observer: Four years have passed since Berkadia acquired Central Park Capital Partners in 2019. How has this move propelled your business?
Noam Franklin: It’s been beneficial for both sides. I think the big benefit of us coming onto the platform was that we now can field the best team on every opportunity. Most people who play in the equity space focus on both debt and equity, and our view is it’s very hard to be good at both debt and equity. Equity is a full-time job.
We’re the best team on the field in our view, and then we’ll bring in the debt specialist at Berkadia to source the senior debt. I think with most of our competitors, it’s more capital markets people trying to find equity on deals. Our clients tell us we’re the only national team they’ve ever spoken to that just focuses exclusively on sourcing equity. We don’t do anything else outside of equity, so I think that’s been a huge advantage for Berkadia as we now have always the best team on the field with debt, equity and investment sales.
Fast forward to this year. Describe the demand for your business as equity gains more traction following the regional banking crisis and overall scarcity of debt.
Franklin: We’ve been busier than ever. The last couple of years has been such a good run in the multifamily side that, realistically, most national developers and owner operators that are that active on a larger scale, most of them haven’t had a need for equity in the last couple of years. It’s been a lot more difficult for national developers to find equity in today’s market. We’re seeing a lot more deal flow than we’ve ever seen from the top-flight owners, operators and developers.
The biggest question, though, is are these deals penciling? We’re seeing so much deal flow, and when we underwrite most of these projects we underwrite everything ourselves internally before we take it to market. Most deals we get from a developer, for example, are based on that developer’s assumptions, which are usually pretty rosy. Normally, we put a more conservative institutional lens on stuff so when we underwrite the project ourselves, most of these deals that are advertising six and a half [percent yield] are really going to be at five and a half or lower. And what we’re finding today is most institutions we talk to on the development side, the deal needs to have at least close to a 6 percent with trended yield on cost for them to even want to dig in.
Chinmay Bhatt: The other other piece to it is in markets like this we really ramp up what we like to call the advisory side of our business, in really helping clients think through what are their options. If they have a portfolio of assets where maybe they have some lower leverage debt in place, they may have needs in other parts of their business. So, do we bring in preferred equity or do we bring in a JV equity partner, and what are the long-term strategic visions that a client has for these deals or for their business, and how do we get you from here to there? Right now we’re actually working with seven clients on larger portfolios of existing assets and going through that exact exercise of what do we do here? Do we do it with a subset of these assets, or all of the assets? What kind of capital do we want to bring in? That advisory work is something that for us is really fulfilling in a way because you’re having that next-level dialogue with the client, and how do we help you with the next phase of your growth, not just “Let’s go get $30 million of equity on this one particular deal.” By the way, we’re happy to go do that too (laughs) but these kinds of challenging times bring a lot more value to our clients in our minds from us being able to just sit down with them and go through strategy and that advisory element.
Chinmay, you had a recent trip to Hong Kong and Singapore to visit Knight Frank. How did that go, and how important is this alliance?
Bhatt: We have this alliance with Knight Frank that we’ve launched earlier this year and we’ve been spending a lot of time with our Knight Frank colleagues, whether it’s Asia or Europe or the Middle East. We were out in London earlier this year, and at the end of April I went out to Hong Kong and Singapore for a week. It was 25 to 30 meetings in five days and we came right back, so it was a grueling schedule but very, very productive. We met a lot of their family offices, large-scale family offices, sovereign and sovereign-backed groups and pensions. We also have a lot of our own overseas capital relationships with whom we’ve done deals with so we were able to line up some of those meetings too, which was helpful.
The general sentiment that we heard is there’s a level of excitement outside the U.S. When there was the pandemic and travel restrictions, a lot of people were not able to deploy as much in U.S. real estate as they would have liked in 2020, and then in 2021 the market was very active and domestic capital was active. Now a lot of overseas capital recognizes that this may be a good time to come into the market to build the right relationships at a time when some of the domestic capital is a little quieter. Student housing was a sector that a lot of groups in Asia were focused on. It’s a sector that they inherently understand, both locally and regionally, but also many of them have studied in the U.S. and the U.K. or their kids are studying in the U.S. or the U.K, so they live in student housing properties. Many groups had already done multifamily deals here in the U.S. and told us their allocation allows them to do more, and then some group said, “Hey, we haven’t done multifamily in the U.S., and we want to figure that out because we recognize that there have been a couple of asset classes that have really been more resilient than others through COVID and other scenarios and multifamily has been one of those so we’d love to learn more.”
Franklin: Chinmay and I and our team have been on calls a lot of times early in the morning talking to the heads of Knight Frank at different regional offices and explaining to them where the opportunities are existing right now in the U.S., and we have been getting on the phone with some of their investors. We are seeing a huge, huge increase in interest in the U.S. right now in Europe, the Middle East and Asia.
Given the challenge of penciling deals today, how important of a role is foreign capital going to play going forward?
Bhatt: We have found that overseas capital can sometimes have a different viewpoint than maybe domestic capital. Some of the groups overseas think of investment periods in seven-, 10- and 20-year cycles versus three-, five- and seven-year cycles. So, for some of the deal flow we’re working on we think that overseas capital can be a really good fit.
What markets are you most focused on now in the U.S.?
Bhatt: In 2021, when we had lower rates and the market was very active, we were able to generate a lot of buzz for deals in primary and secondary markets, but also tertiary markets. What we’ve seen in the last 12 to 15 months is sort of a refocus from the capital side on the larger primary secondary markets, and less on those tertiary markets. Even within the primary and secondary markets, location now matters. So whereas 18 months ago it was a little easier to convince somebody to do a deal that’s an hour outside of Atlanta or in Austin, today we will get asked why are we going this far out and are there opportunities available closer to job centers or to education centers. What we’re seeing is a little bit of a flight to larger locations and better locations within a submarket or a city. We’ve also tailored our approach accordingly with clients to say if you’re dealing with a tertiary market it’s going to be that much harder today to capitalize than it was 18 months ago. In terms of the focus for us, we’re looking across the Sun Belt at the larger secondary and primary markets on the coasts. The Midwest has also been an interesting spot in the market.
Franklin: What we’re noticing now is that if you look at rent growth, the Sun Belt has been outperforming for a long time, and now it’s starting to have a big pullback in a lot of these markets with a lot of supply coming online. What we’ve noticed recently is that the rent growth, which has been steady in the Midwest for a long time, is now having a bigger pop in some of these Midwestern markets. So our team has been starting to reconnect with a lot of our owner-operator clients that are focused on more larger Midwest markets right now, and we think there might be a lot more interest in those markets going forward. Indianapolis, for example, is something that we’re looking at. Columbus, Ohio is another market we’ve been studying and seeing a lot of demand for. There’s real job drivers there, and there’s jobs and there’s rental growth still going on there.
We’re still seeing a huge amount of interest in the Mountain West, too. Salt Lake City and Denver are two markets we’re spending a lot of time in right now talking to owner operators and developers trying to help them find equity partners there. We really want to plant the flag there. We’re also seeing a lot of demand on the East Coast with the Raleigh-Durham area.
Last, how would you say the rising interest rate environment has affected multifamily demand overall?
Bhatt: Real estate as an asset class is somewhat tied to leverage, and when the cost of that leverage expands as much as it has in the last 12 to 18 months and as quickly, you’re going to see an impact. There’s a lot of numbers out there, but overall multifamily trades are down around 60 to 70 plus percent compared to last year, and certainly we’ve all seen that at the ground level. Individual deals are going to be more challenging to get done and you’re seeing projects being shelved in many markets. The challenge for our operators and acquisition groups is there are just not that many deals out there for them to underwrite and pick up, but maybe that will change over the next six to 12 months.
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