Borrower focus: Canvas Properties sees volatile market as a place to fill the funding gap

The firm is seeking situations in which it can provide rescue equity or make other investments is an extension of the firm’s existing business.

New York-based multifamily manager Canvas Properties believes a lack of liquidity in the debt markets today will present opportunities for the company to step in and help high-quality sponsors navigate situations in which exogenous factors have complicated the business plan for an apartment property.

The firm, under its previous branding of Morgenstern Properties, has long been an acquirer of high-quality multifamily properties in New York and beyond. But the current environment has changed the way the firm and its partners are looking at opportunity, said Rob Morgenstern, managing partner. While multifamily continues to be a popular asset class with lenders and investors, there is still less liquidity available.

“There are still loans out there for multifamily that doesn’t have a major retail, hospitality or office component and is of a good size and a good vintage. It is not the market it was six months ago,” Morgenstern added. “You can still get deals done but the diligence needs to be there and, if you’re a sponsor with a real track record, we think we will be able to get lenders on board.”

The focus complements the work Morgenstern and his partners did at Morgenstern Properties, the predecessor company to Canvas. The company seeks to acquire or develop institutional-quality multifamily properties where it can get in at what it believes is an attractive basis and then add value. Canvas focuses on properties in underserved markets, Morgenstern said.

The firm is seeking situations in which it can provide rescue equity or make other investments is an extension of the firm’s existing business, he added.

“We are in a unique moment for deals that were structured over the past four to six years and are finding that many sponsors are seeing that a key component of their business plans changed, be it because of changes in rent laws or the pandemic. Whatever the change, the debt markets are not as liquid as it was and there may be situations where sponsors need some cash to help support their deals,” Morgenstern said.

It’s hard to determine how long this opportunity will be, with Morgenstern estimating it could go on for three or eighteen months.

“There are situations where a good operator with a perfectly reasonable business plan was affected by changing laws, the pandemic or other factors that were beyond their control. We don’t think this will be a blood in the water event, but we think that through our relationships with lenders, sponsors and capital markets brokers we can create a meaningful difference,” Morgenstern said.

The deals the firm is looking for are complicated and will require intense underwriting and analysis. “We could buy a building, we could form a joint venture, or we could help fund an equity gap between what a sponsor wants and what the lender is willing to lend, and we believe this could be a meaningful focus over the next year or two,” he added.

The company invests on behalf of a group of institutional-quality limited partners and is also working to identify opportunities with sponsors in tier one markets which are seeking co-GP relationships. “We could bring a variety of skills to these partnerships, including institutional underwriting, accounting, asset management, GP equity checks and new LP relationships,” Morgenstern said. “Our plan is to diversify our portfolio and scale it around the US.”