Walker & Dunlop Investment Partners | Market Insights from our Chief Investment Officer

Over the last nine months, WDIP has closed six seed investments in our newest value add & opportunistic fund targeting residential and industrial opportunities in the middle market. We’d like to share a few quick investment themes and observations to date:

We may have to wait a little bit longer for multifamily distress.

Of these first six investments, five have been industrial and only one has been multifamily.  We are seeing limited buying opportunities at attractive pricing on transactable, quality multifamily opportunities that are not being heavily pursued by investors. There is still significant dry powder available for Class A multifamily in primary markets, and the very limited inventory on the market is garnering significant buyer interest.

Given an impending refinancing crunch over the next 18 months, we expect this dynamic to change quickly. For now, however, overleveraged owners are reluctant to sell if there is no impending loan maturity or if they can effectuate a cash-in refinance via capital calls or gap financing such as preferred equity or mezzanine loans.

As a preferred equity and bridge loan provider, WDIP is receiving record inquiries from borrowers seeking solutions to upcoming loan maturities and material capital calls. WDIP’s view is that the non-institutional owners and syndicators will be the primary dominoes to fall, lacking the lender relationships and liquidity to forestall a forced sale situation over the coming 12 months.        

Is debt even accretive right now?

Given the higher cost of debt combined with lower leverage, investments generally need to underwrite to an unleveraged IRR of 12-15% to underwrite to a 15-18%+ leveraged IRR.

While debt is still accretive, the additional return achieved through leverage is the lowest we have seen in over 20 years. Although low leverage and high rates make for a difficult underwriting environment, those investments that do pencil out provide tremendous risk-adjusted return parameters with additional upside potential in the event borrowing costs decrease over the period.

‍Go where the capital isn’t.

Five of the first six investments in our new fund have been infill industrial (industrial outdoor storage, manufacturing, and distribution) properties with a total capitalization below $30M and resulting equity checks between $5M and $10M. We are targeting 7%+ stabilized yields for quality infill properties in strong markets. We are finding this profile today via smaller, lower middle-market-sized investments where there is currently less competition from the traditional sources of capital (private buyers, syndicators, high-net-worth individuals), which creates significant buyer leverage and attractive yields. We are also finding that sub-300,000 square-foot industrial product remains extremely tight, with negligible new supply in that size range, continued rental growth, and vacancy rates between 3-5% depending on market. This dynamic is very different for big box industrial, where new supply is having a real impact on vacancy and rental rates in most gateway and core markets.

There are some other pockets of the market with a dearth of capital availability—usually for good reason (office, spec development, workforce housing in older vintage product, secondary/ tertiary markets, and seniors housing). We have the flexibility to evaluate various strategies within residential and industrial product types. Currently, we are strategically focused on smaller industrial but are always looking for relative value in the market where we can avoid elevated pricing and bidding wars with other institutional investors.

Investing with local operating partners is the optimal strategy for capitalizing on the middle-market opportunity set.

Sometimes investors wonder why we prefer to invest with local operating partners instead of investing directly as owner-operators. We adopt this approach because working with operating partners is the most effective way to build and aggregate a diversified institutional portfolio of middle-market investments. Because the landscape of middle-market commercial real estate is highly fragmented, leveraging operating partners is a strategic choice that significantly enhances both the breadth and quality of the investment opportunities our acquisition team targets. By collaborating with specialized local operating partners, we greatly expand our reach, gaining access to a broader array of pre-vetted deals that align closely with our strategic investment criteria. There are many advantages of this approach:

- Multiplicative effect of operating partner networks: Investing through operating partners creates a multiplicative effect on deal flow, much of which is outside the broadly marketed broker-driven market. This increases the volume of deals and the quality and readiness of these investments.

- Enhanced due diligence and pre-vetting: Operating partners identify potential investments and conduct preliminary assessments based on their own deep local knowledge and sector-specific expertise.

- Strategic allocation of internal resources: Instead of dispersing our efforts across numerous markets and asset classes, our team can focus on finding the best partners with readily investable opportunities, strategic analysis, capital allocation, and portfolio management. This operational efficiency allows us to concentrate on both a top-down and bottom-up approach to the investment decision-making process.

- Greater diversification: By investing capital with a variety of local partners, we can achieve a higher level of diversification across different regions and property types. This approach mitigates risks associated with any single market or economic condition.

- Flexibility in investment size, scope, and structure: By partnering with various local operators, we can allocate capital with greater flexibility, tailored to the specific opportunities and market dynamics at hand. This adaptability enables investment across a broad spectrum of projects, ranging from small-scale developments to significant acquisitions. Adjusting investment scales optimizes returns by matching capital outlay with project potential.

- Control: Even as we partner with operators, we remain very active asset managers and always retain control over every material decision relating to the investment.

A sneak peek at our new investments

WDIP closed two investments in April 2024.

Infill Industrial Development

o   Philadelphia, PA

o   $6.2 million, Closed April 2024

o   Shovel-ready, 100,000-square-foot industrial development in an infill Philadelphia submarket with significant population density and high supply barriers to entry

Chicago Industrial Aggregation

o   Chicago, Illinois

o   $4.5 million, Closed December 2023 and April 2024

o   Aggregation of small, cross-collateralized ISF/IOS facilities; 8%+ YOC

As always, we thank you for your continued trust in us and encourage you to reach out to us with any questions.

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Important Information: All investments have risk of loss; past performance is not indicative of future results. WDIP investments underwritten IRR and yield are gross investment performance. Such investments are made for private investment fund and managed accounts and do not account for investment advisory fees and expenses. Such “net performance” to our clients and investors will be lower than the gross investment performance to the client accounts, which are only available to sophisticated accredited investors. This content does not offer or constitute a solicitation or offer to purchase any limited partnership interest, and distribution is limited only to prospective investors with which we have a pre-existing relationship. The opinions and forward-looking statements are that of the author at the time this letter was written and subject to change and market conditions change.