Raising a first-time fund in one of the toughest fundraising environments private equity real estate has ever seen is not for the faint of heart. However, multifamily development and investment firm Sares-Regis Group believes it may have struck on a winning formula for its debut institutional vehicle: bringing in fund of funds Penn Square to help it co-sponsor and raise the vehicle.
As an operating partner to the likes of JPMorgan Asset Management, BlackRock, RREEF and Invesco since 1993, Sares-Regis already is well-known for its apartment deals. But rather than using a placement agent for its first private equity real estate vehicle, the $200 million Sares-Regis Group Western States Multifamily Fund, the Irvine, California-based firm is calling on Penn Square for help.
The deal will see Penn Square handle all fundraising and investor relations for the vehicle, acting as co-sponsor of the vehicle and investing alongside Sares-Regis in relation to the GP co-investment. The Sares-Regis fund will be separate from Penn Square’s own multi-manager funds, for which consultant The Townsend Group acts as investment advisor. In May, the Radnor, Pennsylvania-based fund of funds closed its Penn Square Global Real Estate Fund II on $145 million of commitments.
Kenneth Gladstein, chief investment officer of Sares-Regis’ Northern California operations, said the driving force behind the firm’s decision to launch its first institutional fund was due to the increasing complexity of many multifamily deals today.
With valuations for core deals and competition for more vanilla value-added opportunities rising, Gladstein said the firm wanted greater flexibility to pursue investments that its core and core-plus investors traditionally hadn’t focused on. “As the multifamily market evolves following the downturn, opportunities are emerging that don’t always fit a certain box that our investors are seeking,” he said, citing reverse condo projects, whereby failed condos are converted to rental apartments, as one example.
Gladstein pointed out, however, that one of the greatest benefits of a private equity real estate fund is its discretionary nature. “Sellers are very much concerned about a buyers’ ability to close,” he said. “Providing sellers with that certainty of execution and having the ability to move quickly can make all the difference when you’re trying to source off-market deals.”
Targeting value-added multifamily deals, particularly in California, Colorado, Arizona and Washington State, the Sares-Regis fund is expected to hold a first close in the second quarter. Investor appetite for multifamily has increased dramatically over the past year as the sector leads the US real estate recovery with rising rents and occupancy levels fuelled by improving demographics and a lack of supply.
However, with some deals seeing cap rates fall below the 5 percent mark, concern is mounting of a bubble in the sector. Gladstein said areas such as the centre of the San Francisco Bay area, where demand was significantly outstripping supply, were seeing rising valuations but even that could be harnessed by private equity real estate firms, with current pricing levels still representing a discount to replacement cost and rental income remaining well below their cyclical peaks.
Gladstein added: “We are actually seeing some of the appetite for Class A multifamily as an opportunity because, as REITs and pension funds increasingly move into the core space, they are shedding older properties in secondary locations that they don’t want to invest the capital in.”
If you do not receive this within five minutes, please try to sign in again. If the problem persists, please email: 
