Despite the lack of multifamily sales over the past year and some deterioration in values, money is still lining up to buy apartments. 

“We've never had more interest from equity investors,” Spencer Gray, CEO of Indianapolis-based apartment owner and operator Gray Capital, told Multifamily Dive.

The problem is the apartments on the market don’t currently make sense for Gray and his investors. 

“There’s not a lot of interest [from investors] in marginal deals and projects that have relatively low returns,” he told Multifamily Dive. “They’re looking at the markets and the economy, and they’re seeing uncertainty and some risk.”

Gray and his investors would like to have 15% internal rates of returns on the properties they buy. But right now, returns are sitting in the 10% to 14% range. So Gray, like other executives around the country, has pivoted to get those returns. While he would still like to add to his roughly 6,700-unit portfolio in the Midwest, he sees more immediate opportunities offering struggling owners a capital lifeline. 

“We've started recently to deploy preferred equity to other multifamily owners in a situation where they have a gap,” he said. “They're trying to refinance, and they just don't have enough capital to actually refinance.”

While preferred equity may provide the returns that Gray and his investors want, his firm isn’t getting out of the operations business. In fact, he’s still looking at deals, though ones that make sense are few and far between.

Here, Gray talks with Multifamily Dive about potential distress, bank extensions and the role of preferred equity.

This interview has been edited for brevity and clarity.

MULTIFAMILY DIVE: Are you seeing money line up for potential distressed assets?

SPENCER GRAY: We're seeing a lot of interest in that space. There is a lot of talk of opportunity funds and distressed funds raising capital for that purpose. But there are very few deals that meet that criteria, with banks still working with those borrowers. I think a lot of groups kind of smell blood in the water, but it's not flooding the streets. It's not materializing everywhere, but it's pretty early in the process. So it's not too surprising that we're not seeing a lot of pain yet.

Right now, banks are working with owners under stress. How long do you think that lasts?

There's been a willingness to kick the can down the road a little bit more. A couple of months ago, there was still a glimmer of hope that maybe we'll see lower interest rates by the end of this year or maybe early next year, which could open up potential possibilities. But then the 10-year Treasury hit 5% a couple of weeks ago, though it has come down since then. 

What did the 10-year Treasury hitting 5% do to the market?

I think that was a psychological marker to many market participants that when they saw that, it was too far away from where we needed to be. When the 10-year Treasury was in the mid- and high-3% range, that was still too high to make many of these deals work. So we've got quite a bit of work to do to come down to start making them look attractive to your typical investor. 

Not that there isn't institutional capital out there still looking to deploy, but for the majority of the market, the deals are just still too skinny.

How did you get into the pref equity space?

This started because investors were coming to us and saying this is really where they wanted to play. We knew of the thesis and the challenge with the loan maturities. We put together a couple of our own research reports on the topic, and we've been following it for a while now. 

So, we started an outreach to owners and sponsors. And we have been absolutely inundated with multifamily owners and sponsors getting in touch with us for financing. 

What groups seem to be most in need of capital?

The most well-capitalized, largest groups are typically in good positions. Still, surprisingly, even some good-sized middle market groups have multiple properties with bridge loans that are expiring soon or floating rate debt with interest rate caps that need to be repurchased. 

We're also getting a lot of sponsors reaching out to us. They’re in the middle of fundraising for a new acquisition, and they just can't raise the capital. They are coming to us just looking for any sort of financing. 

When we started this, we weren't sure how many deals we would find. It was really, “Let’s see if anything is out there.” But we've had to stop accepting initial submissions because we have been looking at so many projects. 

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