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Why Affordable Housing Is No Longer a Niche Investment Strategy

Avanath Capital Management CIO: 80% of U.S. renters make between $36K to $60K a year; we target the largest segment of renters, but it has the least new supply.

IRVINE, Calif. – As the U.S. faces an acute affordable housing crisis, it’s gaining in popularity among commercial real estate investors of all types. Some firms, however, have been playing in the sector longer than others and have had the time to learn some of the nuances of raising money for and investing in affordable housing.

Founded in 2007 by former National Multi Housing Council chairman Daryl Carter, Avanath Capital Management was one of the first investment firms to  bring institutional capital into the affordable housing space. (The firm got its name from Carter’s children, Ava and Nathan.)

Today, Carter leads the Irvine, Calif.-based firm as chairman and CEO, alongside John R. Williams, who serves as president and chief investment officer. Together, the duo has expanded Avanath’s footprint, building its portfolio to 100 affordable housing communities totaling more than 11,000 and $3 billion in assets under management. The firm, which also has offices in Chicago and Washington D.C., operates in 40 markets in 13 states.

In late 2020, Avanath closed its fourth affordable housing fund, raising $760 million from a variety of investors. The firm raised at least half the capital during the height of the COVID-19 pandemic and is actively deploying it in high-cost markets. Most recently, it acquired Acton Courtyard, a 71-unit fully affordable community in Berkeley, Calif., from Equity Residential for approximately $25.3 million. Wealth Management Real Estate (WMRE) recently spoke with John R. Williams about the firm’s strategy, equity-raising efforts and return expectations.

This Q&A has been edited for length, style and clarity.

WMRE: What is Avanath’s investment strategy?

John R. Williams: We specialize in affordable and workforce housing across the United States. People think we have a niche strategy, but 80% of renters in the U.S. make between $36,000 and $60,000 a year. So, we target the largest segment of renters, but it’s the one that has the least new supply.

When people say we have a niche strategy, I say, “No, a niche strategy is building an apartment building in downtown Los Angeles and trying to rent it out for $6,000 a unit. That’s targeting the top 1%. That’s niche.”

The majority of assets we buy and own were built with tax credits that require them to be affordable, or they’re funded by HUD as Section 8. About 20% of what we own is naturally occurring affordable housing (NOAH) or workforce housing, which are nice B properties that are never going to be A properties.

We target cities where there are a lot mid-market and lower-tier jobs making $30,000 to $50,000 a year, but housing is very expensive, and it’s hard for people to live in market-rate housing. These high-cost cities include Seattle, Los Angeles, Chicago, Austin, Boston, NYC and Orlando, among others.

We want to be in markets where there’s a delta of 25% to 30% between our rents and market-rate rents. Our average rent is $1,200.

WMRE: What was Avanath’s original vision and mission? Has that changed over time?

John R. Williams: We saw a lack of institutional capital in the affordable housing space and thought there would be opportunities to change that and change the world by providing high quality affordable housing. Since then, we’ve seen a lot of institutional capital flow in the space, but our original vision and mission hasn’t changed.

WMRE: What type of investors does Avanath’s target?

John R. Williams: Our investors are U.S. pension funds, endowments, foundations, banks and corporations, along with family offices and a few high-net-worth individuals. We also have U.K. foundations and family offices and European pension funds (German and Dutch).

We have a $5 million investment minimum, and the maximum is dictated by the investors. Most investors don’t want to be more than 20% of a fund. The biggest investor in fund four put in $100 million, which is about 15% of the entire fund.

WMRE: Do you anticipate your investor base will change in the near future?

John R. Williams: I don’t know. It might. Prior to our last fund, 90% of our investors were U.S.-based. For our last fund, more than 50% came from European and UK investors. We also had a lot of Asian investor interest, mostly Japanese and Korean, but because of COVID and travel restrictions, they couldn’t complete their due diligence.

Our fund attracted a lot of interest from European investors because they get the idea of ESG (considering environmental, social and governance factors when investing), and they’re familiar with and comfortable with rent-restricted housing. The Asian investors that were interested are overbought in their own countries, and they have to diversity outside of them.

WMRE: How did you establish relationships with your institutional investors?

John R. Williams: This is the third company I've started the fund business for. I went to a lot of folks that I knew, and I’m not saying they all invested, but they were good references for new people to target. The same with Daryl Carter – the institutional landscape is what he knows too. So, we go to the big institutions when we fundraise because that’s where we come from.

WMRE: How does Avanath attract new investors? What have been the biggest challenges you’ve faced in terms of raising capital?

John R. Williams: We could have raised over $1 billion for the last fund, but with COVID, we just ran out of time. We have a lot of contacts at the industry. We speak at a lot of conferences, and we get referrals from existing investors. We work with placement agents for non-U.S. investors. [Affiliates of the Accord Group, based in San Francisco and London, and Selinus Capital, based in Frankfurt, provide placement services for the European and U.K. investors.]

WMRE: How does the firm communicate and keep the conversation going with its existing investors to make sure they are on the same page regarding strategy, targeted returns etc.?

John R. Williams: COVID has changed the way we interact with our investors. Over the past 18 months, we’ve over-communicated because people were concerned about their investments.

Because of COVID, we do a lot less in person and a lot more on Zoom. In the past, I’ve jumped on a plane for a one-hour meeting in Frankfurt and immediately turned back. Now, I’m more reticent to go in person, so I say, “Why don’t we do a Zoom meeting to start?”

We usually have a live annual meeting, but last year, we did it completely virtual and had 150 people dialed in. We host mid-year investor calls, provide quarterly reports and try to reach out to each investor at least quarterly, usually via phone. We handle fund administration internally, and we have a robust investor portal.

WMRE: How has the pandemic impacted your investments?

John R. Williams: Throughout COVID, our performance has been really strong. Our portfolio is 99% occupied, we’ve had 99% on-time rent and third-party valuations are up 20%.

WMRE: What differentiates Avanath from other investment firms?

John R. Williams: A lot of people talk about ESG, but we’re the real deal. We provide high quality affordable housing and invest in programming. In the U.S., these big clubhouses in apartment communities are largely unused during the day, so we match the space with the use. We provide the classrooms, snacks, and students. We have teachers come in for homework club every day after school. We invite basketball coaches to host basketball clinics. We bring in bankers to teach financial literacy classes. We have art classes for kids and exercise classes for seniors. We also have programming focused on health and wellness. We had COVID vaccination clinics on-site at our communities at no cost.

The cost of the programming is off-set by resident loyalty, low turnover and high occupancy. Most of our properties have waiting lists of 50 people to 300 people.

When we acquire a property, we spend $15,000 to $25,000 per unit. A lot of that is deferred maintenance. We put in more energy-efficient appliances, LED lighting, zero scape landscaping and solar panels – all improvements that reduce energy bills for our residents and contribute to our ESG.

We do right by our residents, we do right by our investors and we try to do right by the environment.

WMRE: What is the range of returns that you expect on your investments?

John R. Williams: Eleven to 12% net. But since our properties are full, half of that return comes from cash distribution and half from the sale of the asset. There’s perceived safety in that.

WMRE: What is your average hold period?

John R. Williams: Six to seven years for our past funds. We’re planning to raise an open-ended fund in early 2022.

WMRE: The multifamily sector is one of the hottest and most competitive asset classes today. How is Avanath facing competing buyers and coming out on top?

John R. Williams: We have eight people on our acquisitions team, including me and Daryl. About 50% of our deals are off-market. Throughout COVID, winning deals has been execution-oriented versus highest price. Maybe we have four or five competitors for a property, but they’ve never bought affordable housing before, and we’re approved by HUD to provide affordable housing by 54 different municipalities. Sellers will say, “It might take months for the other buyers to get all their approvals, but it’ll take Avanath 30 days.” Ultimately, we win deals because sellers are more confident that we can close.

WMRE: We’re well into the third quarter, and 2022 is just around the corner. What plans do you have for Avanath for the rest of this year and next year?

John R. Williams: We’re spent $380 million of fund four, and we plan to be fully invested by the second quarter of 2022. We’re also launching an open-ended fund for affordable housing at the beginning of next year – that will be our primary investment vehicle. With the open-ended fund, we could attract some new investors. We’re also going to move our funds one and two into the open-ended fund; we’re going to sell them into the new entity.

To date, we’ve not done any development, but our new open-ended fund will have a development component – affordable housing, of course. And we may do some re-syndications of LIHTC deals. We will have the ability to do them if we like.

Finally, we have ESG goals of reducing our carbon footprint pretty substantially over the next 10 years. We’re well on that path, and that will continue.

WMRE: What is the biggest success that the company has experienced? What is the biggest failure?

John R. Williams: We’ve built a $3 billion business in an industry that people didn’t think was institutional, and in doing so, we’ve changed people’s lives on the ground – our employees, our investors and our residents.

By providing high-quality affordable housing and programming, we got kids through high school and into college. One of the coaches leading our basketball program saw a kid playing and gave him a scholarship to a very high-cost Catholic school. That kid went on to play basketball in college. That’s our success.

As for as failures go, when we first started [during the Great Financial Crisis], we were very granular and strict with due diligence and analyzing things. But we should have bought everything and taken every opportunity because it’s all making money now.

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