Hudson Valley Property Group, a New York-based manager that focuses on investment and restoration in the affordable multifamily sector, has closed a $292 million real estate private equity fund at a time of great volatility in the commercial real estate debt markets.
But Jason Bordainick, managing partner and co-founder, said the firm is not expecting to see significant headwinds as a result of an almost insurmountable need for affordable housing and a wide swath of lenders targeting this part of the market.
“The real estate debt market is liquid for our asset class,” Bordainick said. “The three main lenders include Fannie Mae, Freddie Mac and FHA, which each have targets to meet for preserving affordable housing.”
HVPG has considered working with debt funds when more flexibility is needed in underwriting or financing deals but has so far refrained from borrowing from this group of lenders, Bordainick added.
Despite the liquidity, rising interest rates are affecting the entire commercial real estate sector.
“Interest rates have continued to move up with the actions taken by the Federal Reserve, a move which [in turn] impacts how much debt market participants can leverage on an investment,” Bordainick said. “This is starting to impact some of the pricing for the assets.”
The cost of debt is also affecting the price the firm can pay for an asset, particularly in situations where significant leverage is needed. “In certain instances, we will consider assuming the existing debt, if more favorable, and maintaining lower leverage during the hold,” he added.
HVPG is adopting a wait-and-see approach before acting on any opportunities.
“We expect rates to continue to climb until inflation gets to a more manageable level,” said Bordainick. “Since it’s impossible to know when that will be, we will be selective with what opportunities we work on, consider both levered and unlevered returns and identify ways to improve our speed of execution to minimize the interest rate risk exposure between contract signing and closing.”
Fund profile
Hudson Valley Preservation Fund II, the firm’s second real estate fund, lined up capital commitments from institutional investors including family offices, banks, endowments, foundations, insurance companies and healthcare companies, and surpassed its target by $42 million – as per affiliate title PERE reporting.
The firm’s strategy for the fund is to target Community Reinvestment Act-eligible properties and focuses on the renovation and preservation of existing affordable housing. The manager lined up 83 investors for its second fund, 77 percent of which were institutional. The remainder of the fund’s investors is comprised of high-net-worth investors and family offices. About 70 percent of the 40 investors that made commitments to the firm’s first fund almost participated in its latest offering.
“We experienced a very high rate of investors not only recommitting but also upsizing with the latest fund,” Bordainick said.
Investors wanted to grow their exposure to the strategy in tandem with a desire to prioritize strategies that can perform well in both inflationary times and during market downturns, added Bordainick.
“Affordable housing preservation is a resilient real estate strategy that is expected to continue to do well in the market environment,” he said.
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