The funds are here. The opportunities, not so much.
While many opportunity funds have been raised over the past two years, investors continue to bang their collective heads against the wall as they survey a scarce acquisition market. Class A assets in solid locations are inspiring frenzied bidding wars, while the volume of deeply distressed assets has yet to reach a critical mass.
But some of that pent-up equity waiting on the sidelines may re-adjust its expectations in the second half by shifting away from acquisitions and to new development in high-barrier markets. Many institutional partners are having trouble sourcing higher return acquisition opportunities, especially in high-barrier markets, and as a result, they're turning back toward development.
Acquisition opportunities within multifamily just haven't manifested at the return or volume levels these funds need, so they're looking for higher return opportunities and risk-adjusted development is looking more and more attractive. In markets like Boston, D.C., Northern and Southern California, we believe the best opportunities are to develop, and our capital partners agree.
Brokers are reporting a jump in institutional capital looking for new construction deals, and expect more investors to follow. New development candidates are few and far between, and each deal is being heavily scrutinized, but investors are realizing that the yields they targeted will likely not be met through today's acquisition market.
Investors are saying, If we can build to a 7 percent or 8 percent cap, maybe it's worth taking the construction lease up risk if the market is that tight for acquisitions.
The equity market has grown more constrained this year, as pension funds, life insurance companies, and other institutions stay on the sidelines waiting for a bigger volume of distressed assets to hit the streets. Return expectations from institutional equity providers now run from the mid-teen percentiles up to 25 percent, an increase of about 300 basis points to 500 basis points since mid-2008. But the most active buyers today are private, regional players scooping up assets from larger institutions.