Mesa West pivots toward multifamily as new originations boom

The debt fund manager has originated about $2.5bn of new loans so far this year.

Mesa West Capital has made a conscious effort to pivot its portfolio toward the multifamily sector, with a significant margin of the debt fund manager’s roughly $2.5 billion of originations this year targeted toward this part of the market.

The firm has been very active in the sector so far this year, originating a slew of loans in high-growth markets in the Sunbelt and Western US in response to the defensive nature of the sector and the supply-demand profile of the US housing market. There’s also been extremely high transaction activity, Brian Hirsh, vice-president of originations, told Real Estate Capital USA.

“Multifamily has been the most active asset class and cap rates continue to compress as investor demand rises,” Hirsh said. “We are seeing lower going-in cap rates, lower debt yields and higher valuations. But at the same time, we are seeing a lot of real rent growth in markets like the Carolinas, Florida, Texas and Arizona.”

That observation is backed by up strong research, including third quarter data from Real Capital Analytics that found that multifamily transactions reached $78.7 billion in the third quarter, a year-on-year increase of 192 percent. Year-to-date, the sector has seen $178.5 million of transaction activity, a 115 percent rise over the previous period in 2020.

Investment thesis

Mesa West, which deploys capital via a series of real estate private equity funds and separate accounts, sees definitive downside protections in the sector.

“As you enter more volatile economic conditions, that protection becomes more valuable,” Hirsh said. “The office market is a little more binary right now, with owners there waiting for tenants to sign bigger leases and comeback to work. But in the multifamily sector, properties tend to stay full, rents go up and down, but there is generally a tighter range of cash flow outcomes in the asset class.”

Recent loans include a $77 million loan on Alta Congress, a 369-unit apartment property in Delray Beach, Florida. The 2013-vintage property was an attractive play for Mesa West, which likes the supply constraints to new development in the market, adjacent shopping and other amenities. The property was 96 percent leased when the deal was closed, Hirsh added.

Mesa West often lends on 1980s-vintage properties with heavier business plan or core, new-build construction. “We invest out of a couple of different buckets of capital and look at deals that span from heavy value-add business plans to new trophy product,” Hirsh said. “For older vintage properties, we look for assets that are well built and maintained, and sit in desirable locations.”

Hirsh noted that the market feels efficient and healthy across many sectors. “There is certainly an abundance of capital on both the equity and debt side that is driving transaction activity,” he said.