Lili Dunn sees a lot of ‘dry powder’ for apartment investments

No one would mistake this year as an easy fundraising environment for multifamily ownership groups looking to raise capital. But the volatile economy didn’t stop Greensboro, North Carolina-based Bell Partners from closing its Value-Add Fund VIII in June at a hard cap of $1.3 billion in equity commitments from domestic and international investors.

“It’s an interesting time to be closing funds, given that a lot is happening externally in the market,” Bell Partners CEO Lili Dunn told Multifamily Dive.

In rocky times, Dunn said, investors tend to go with proven partners that are disciplined and focus on strategies consistent with their core competencies.

“We are very grateful for the interest that we had,” she said. “It is difficult for new managers now to attract capital, especially if you don’t have an established track record in that space.”

With leverage, Bell’s value-add Fund VIII has an investment capacity of approximately $3.2 billion. It will focus on properties in 14 target markets, including Boston; Washington, D.C.; Raleigh and Charlotte, North Carolina; Atlanta; Fort Lauderdale, Orlando, and Tampa, Florida; Austin, Texas; Dallas; Denver; Los Angeles; San Francisco and Seattle.

“They’re all markets that we have been investing in for years,” Dunn said. “We look at creating a geographically diversified portfolio based on evaluating demand-supply fundamentals, future demand fundamentals, as well as long-term performance.”

With an average hold period of six to seven years, Bell will have a long-term perspective. The fund’s strategies include renovations, enhanced operations, and investment in transitioning neighborhoods.

The close of Fund VIII follows the close of Bell Partners’ $930 million Bell Core Fund I in 2022, which complemented its value-add investment strategy. Bell has closed nine funds and numerous other separate accounts with equity commitments of over $6 billion since launching the platform in 2006.

Waiting for deals

Bell has bought and sold real estate in all types of environments over its more than 40 years in business. Still, Dunn acknowledges that this is an interesting time.

“There is volatility with geopolitical events and economic conditions,” Dunn said. “We’re aware of the volatility and risk, but apartment investment tends to be defensive, particularly during periods of uncertainty and contraction.”

Though the transaction market has been slow over the past year, Dunn still sees a lot of competition. She thinks valuations have fallen 10% to 15% and cap rates have risen about 100 basis points, though that has been somewhat offset by growth in net operating income. “It’s difficult to know exactly where pricing actually is,” she said. “There’s clearly a lot of dry powder for apartment investment.”

With core buyers and REITs largely on the sidelines, Dunn sees activity from private buyers or closed-end funds looking for core-plus products at value-add returns. She does not see a lot of distressed activity, but some sellers are facing issues with construction debt or difficult partnerships that require an exit, among other things.

“We’re seeing sales from these perpetual vehicles that are facing redemption queues or assets that have challenging financing situations up against maturity dates,” she said. “Floating rate exposure is a very big deal.”

In other cases, some sellers, including Bell, might have had a strong, profitable run with an asset for five or more years and want to exit.

“If it has attractive assumable financing with some reasonable term left and we’ve had the asset for five or six years, the buyer pool tends to be pretty deep,” Dunn said. “We’re able to harvest opportunities and still meet very high multiples above our pro-forma levels.”