GreenOak Raises $1.55 Billion for Real Estate Deals in the U.S.

(Bloomberg) -- GreenOak Real Estate has raised $1.55 billion for its third U.S. fund, the largest yet for the firm formed by former Morgan Stanley property executives.

New York-based GreenOak has more actionable deal opportunities than it has in the last three years, partner and founder Sonny Kalsi said in an interview.

“There’s limited distress, and those real estate owners who missed the 2015 market peak and have been hoping for a rebound are finally biting the bullet and now have much more realistic price expectations when they come to market,” he said.

The new fund is targeting returns of about 15 percent after fees, which it intends to achieve through value-add real estate investing. That involves buying existing properties, then renovating and repositioning them before an eventual sale after roughly three to five years. Use of leverage will be “modest” at roughly 60 percent, in line with the firm’s average, Kalsi said.

While GreenOak has historically spent most of its capital in New York, San Francisco, Los Angeles and Boston, it will also target other major cities, including Seattle, Washington and Miami. All are more likely to be resilient in a downturn than less-populated areas.

“These are cities with diverse employment bases and large education centers, where people of all ages want to live,” Kalsi said. “Our goal is to buy unloved or undermanaged real estate, then fix, stabilize and sell it, so we need to invest in markets where there’s liquidity.”

As investors flooded the firm’s favored cities in recent years, GreenOak decided to do more selling than buying. But the tide is turning, and the firm expects to be a “net buyer” this year, Kalsi said. The new fund has the capacity to execute some $5 billion worth of deals, including borrowings and co-investments from pensions and other fund investors, and already is almost a fifth of the way through that total.

As investors flooded the firm’s favored cities in recent years, GreenOak decided to do more selling than buying. But the tide is turning, and the firm expects to be a “net buyer” this year, Kalsi said. The new fund has the capacity to execute some $5 billion worth of deals, including borrowings and co-investments from pensions and other fund investors, and already is almost a fifth of the way through that total.

Hotels are a type of property that GreenOak, founded in 2010, has become increasingly comfortable owning. After purchasing majority stakes in L.A.’s Figueroa Hotel and a Yotel in San Francisco, the firm last year teamed with Highgate Hotels to buy the Gansevoort Park Avenue NYC, now known as the Park Avenue South Hotel, for about $200 million.

“We had been nervous about oversupply in New York but now feel like the market is close to or at the bottom and that there are pockets of good value,” Kalsi said.

Multifamily, Offices

GreenOak also sees value in mid-market multifamily buildings in New York priced in the range of $1,000 to $1,500 a square foot, and so-called Class B offices, which are slightly older and require refurbishment or other improvements. As for retail, Kalsi said that while he wouldn’t want to own a mall, “urban street retail in densely populated cities like New York and San Francisco is becoming increasingly attractive.”

Unlike larger rivals including Blackstone Group LP, one type of property the fund doesn’t plan to pursue in the U.S. is warehouses, in part because the opportunities fall short of its targeted returns. Industrial real estate has been a focus for GreenOak in Europe, where it’s amassed more than 22.5 million square feet (2.1 million square meters) of warehouse space throughout Spain, Italy, France and the Netherlands. The firm last month raised 911 million euros ($1.1 billion) for a second European fund.

Investors in GreenOak’s third U.S. fund include the New York State Common Retirement Fund, the Teachers’ Retirement System of Oklahoma, the Tennessee Consolidated Retirement System and the City of Austin Police Retirement System, according to data compiled by Bloomberg.

The new effort follows GreenOak’s $756 million second U.S. fund, which has sold about a quarter of its holdings and, so far, has projected net returns of 13 percent, according to marketing documents. The firm’s debut U.S. fund, with $260 million, has delivered net returns of 32 percent, the documents show.

With the third U.S. fund, GreenOak’s total assets under management have eclipsed $10 billion. That makes the firm comparable in size to Boston-based Rockpoint Group, which sold a stake to a Blackstone fund in March, and slightly smaller than Chicago-based Harrison Street Real Estate Capital, which on Monday announced the sale of a majority stake to Colliers International Group Inc.

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