Borrower view: CARROLL set to step up as financing dislocation rises 

Atlanta-based multifamily investor CARROLL is set to step up its investment game as dislocation stemming from rising interest rates is creating more opportunities in the tightly bid sector.

The firm has been an active buyer and seller over the past year, and earlier this month it completed an $855.5 million sale of a portfolio of workforce housing assets in Sunbelt markets with partner PGIM. But as the sales process for that portfolio wound to a close, founder and CEO Patrick Carroll began to observe some significant changes in how multifamily assets were being underwritten by lenders and borrowers.

“Everything in the multifamily sector is so tight and the sector was in a situation where everyone’s underwriting, assumptions and cost of capital was roughly the same,” Carroll said. “People started running on autopilot and then, all of the sudden, interest rates spiked and everyone freaked out. But the way we are viewing it is that we would like to buy through this and we would like to take the 10 to 15 percent discount that we are seeing on properties because we love the real estate and we love the asset class.”

The firm is now investing its seventh real estate private equity fund and has a stable of lenders on its working roster, including Fannie Mae and Freddie Mac providers. “Our lenders have always told us that our size has meant that we get better terms and pricing, but now is the first time that I have really seen that play out,” Carroll said. “Lenders are more often going with the groups that have been around, have gone through tough times like this and have strong balance sheets.”

There is a certain amount of confusion and disconnect in the market right now, including a big gap between buyer and seller expectations.

“At the same time, lenders have basically frozen because they can’t project the next several years so things are all over the board,” Carroll added. “If you have a multifamily deal in the market, you should expect it go for 10 or 15 percent less than you would have seen 90 days ago. And that is really just from the rise in interest rates and the availability of debt. It is hard to understand where the forward curve is going to be and it is hard for lenders to make loans now.”

In its most recent sale, CARROLL and PGIM Real Estate disposed of 12 multifamily Class B properties in Florida, North Carolina and Tennessee to Clarion Partners. The 3,564-unit workforce housing portfolio was part of a 2017 acquisition of a larger 28-property portfolio that marked the duo’s first collaboration.

The partners held the properties for four years and made a number of sustainable upgrades including adding LED lighting to reduce energy consumption by as much as 75 percent and investing in water-saving devices like low-flowing toilets to save about 50 million gallons of water each year.

“We thought, ‘If we are going to exit, now is the perfect time to do it. Cap rates were at all-time lows and interest rates were relatively low,’” Carroll said. “But also, we really loved these assets and were fine either holding them or selling them. But Eastdil was able to close the sale during a time when a lot of deals were seeing people drop out, given the spike in interest rates.”

The sale allowed CARROLL to take some chips off the table and redeploy capital for what could be longer-term holds. Carroll first began investing in these markets in 2011, well before this part of the market gained the steam it is seeing today.

“The market itself is fantastic – I have never seen anything like it. Rent growth has been consistently in the range of 20 percent,” Carroll said. “Over the next three to five years and beyond, just looking at demand drivers, there is not a better asset class to be in.”

Looking ahead, it is possible the firm will expand into new markets. CARROLL recently acquired its first property in Phoenix and could even look at assets in New York. “It is a tricky market, but it is every real estate owner’s dream,” he added.