Waiting is the Hardest Part


Brian D. Milovich

Managing Principal, Calvera Partners

Waiting is hard. We just acquired an apartment property in Fort Worth, Texas, two years after our last acquisition in August 2021. Our business is buying, improving, and operating apartment buildings in high growth markets across the US, so if we’re not excited about adding to our portfolio, then something is probably wrong. Still, it wasn’t for a lack of trying. We kept evaluating deals in numerous markets, submitting offers, and trying to shake properties loose. The prices people were paying, the debt they were taking on, and assumptions that had to be made were mind-boggling to us, which caused us to question ourselves. Not only that, investors in our Multifamily Transformation Fund were asking us questions, too, since we have a set period of time to spend the fund capital. 

If we couldn’t buy, at least we could sell. Since the market was extremely frothy in late 2021 through early 2022, we decided to sell a property we owned in Austin, Texas. That move proved fortuitous given the pull back in rents and rise in cap rates in the market, both leading to further declines in value. We were fortunate to take advantage of that window. Now that pricing has adjusted and may adjust further, we’re looking for ways to get back into the Austin market. 

Prior to the Fort Worth purchase, our last acquisition was a 307-unit apartment property in Carrboro, North Carolina in August 2021. Carrboro is adjacent to Chapel Hill and is part of the Raleigh-Durham-Chapel Hill “Triangle.” Deals didn’t make sense when we purchased this asset either, but it had some challenges that we saw as benefits at the time. The University of North Carolina at Chapel Hill (UNC) was still essentially closed and under remote learning from the pandemic. The Town of Carrboro seemed empty, and apartment occupancy was languishing. Given that the rest of the Triangle had just started to experience inflationary rent increases, we thought the Chapel Hill/Carrboro market would similarly accelerate once UNC re-opened, which it did that fall. The other key factor to the deal was that we had to assume a 10-year loan at a 4.13% interest rate with 9 years of term left. By today’s criteria, that’s a dream loan, and we knew this looked good by historical standards. At the time, though, it was an above market interest rate. As a result, we received a discount on the purchase price to make this an ideal acquisition for Calvera. The investment landscape hasn’t been the same since. 

We can pat ourselves on the back for not buying properties in 2021 or 2022 at a 3% cap rate, taking on high-leverage, short-term, floating-rate bridge debt, and assuming double-digit rent increases would continue indefinitely. Those deals are hurting and will be in full-blown distress shortly. However, once the Fed started their historical hiking of interest rates, just about every group started to wait. As I’ve mentioned before, investment volume is down 71% compared to a year ago and is on par with 2009 levels during the Great Financial Crisis. Not much is getting done as owners deal with their over-leveraged properties that have expiring interest rate caps. And, the pile of dry powder waiting to pounce on bargains is hoping deals get really juicy. I’m not sure they will. 

Rather than sitting on the sidelines, we are taking a more practical and measured approach to acquisitions. Values of apartments are down 20-30% or more in the markets we follow. As interest rates rise, investors expect a higher yield for their money. We are also big believers in basis—the value per unit or per square foot relative to other transactions. If a deal can quickly generate a cap rate close to or in excess of the interest rate of the loan, then it’s worth evaluating. The best markets have plenty of capital waiting to purchase properties, and once the spread widens more, competition will increase. We believe that the current market environment is the start of a new buying cycle. Going-in yields are 150-200 basis points higher than they were 18 months ago, and today’s basis can revert properties back to anywhere from 2017 to 2020 vintages, depending on the market. These factors alone excite us. 

All of this led us to our first acquisition in just over two years. In mid-September, we purchased a 192-unit apartment property in Fort Worth, Texas. Fort Worth is the fastest growing large city in America and is part of the Dallas-Fort Worth (DFW) metroplex that continues to surpass all growth expectations. Given all the positive metrics and demographics, the DFW metro has been near the top of our lists of markets to pursue. This property checks all the boxes with a value down 20%+, a per unit basis below recent transactions, a location in a fast-growing market, and a tenant base underserved by new apartment supply. Additionally, we will be able to improve operations at the property and implement branding and other renovations to maximize the investor return. 

Waiting isn’t fun, but it can be the right thing to do.

Calvera Partners Acquires Fort Worth Multifamily Property


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