Lennar Corporation is planning a multifamily construction spree financed by the biggest-ever capital raise for the property type.
The company’s subsidiary, LMC, closed Lennar Multifamily Venture (LMV) on $2.2 billion last month after launching the vehicle in the fourth quarter of 2014 with a $1.25 billion to $1.5 billion target. With capital from LMV, the Miami-based firm will develop Class A multifamily communities in 25 target markets throughout the US.
Lennar committed $504 million to LMV, with the rest of the capital coming from six institutional investors comprising foreign pensions, sovereign wealth funds and insurance companies. Sydney-based Macquarie Capital was the financial advisor and placement agent for LMC.
“This $2.2 billion in equity is being managed by a very large business that has operations all across the country,” said Chris Green, Macquarie’s global head of real estate. “When you think about it in the context of the available investment set, it’s a pretty modest amount of money to be deployed.” There were approximately $153 billion of apartment trades in the US during 2015, according to data provider Real Capital Analytics.
Commenting on Lennar’s particular approach to multifamily, Eric Wurtzebach, a senior managing director at Macquarie, said: “When we look at all the develop-to-core deals we’ve done, we liked the idea that you can get anywhere from a 150 to 200 basis point spread in the development yield.”
Two market sources both voiced concerns about developing new multifamily at a time when many markets already have oversupply and given the current difficulty of securing development financing.
Wurtzebach countered that oversupply will not be problematic because LMC is building in markets with high population growth that can absorb new construction. Also, the fund’s limited partners have a long-term investment horizon and consequently gravitate toward new construction because the buildings will not require as much upkeep in 10 or 15 years as existing multifamily properties.
Additionally, LMC uses much lower leverage than some of its peers, so a tightened construction financing market impacts the firm less, he added. Because construction lending has contracted in the last six months, he predicted that other firms’ multifamily projects will be shelved, however.
“Lennar has great access to capital and a big balance sheet,” he said. “As lenders tighten up, that's to their advantage relative to some of the smaller developers.”