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Harbor Group Raises $1.6 Billion for First Apartment Debt Fund

(Bloomberg)—Harbor Group International closed on a $1.6 billion fund to finance apartment buildings and other multifamily properties as higher interest rates offer attractive returns for lenders willing to put money at risk.

A unit of the Canada Pension Plan Investment Board committed $585 million to the HGI Multifamily Credit Fund, the company said Wednesday. The fund offers fixed and floating-rate senior, mezzanine and preferred-equity loans at rates of about 8% to 12% depending on the type of debt, according to Richard Litton, president of HGI.

The fund, HGI’s first devoted exclusively to multifamily debt, began raising money in late 2021 before last year’s interest rate surge and concludes as many banks and other lenders pull back from commercial property deals because of concerns about falling values and rising default risks. Lending for multifamily properties is expected to decline 11% to $393 billion this year, according to the Mortgage Bankers Association.

HGI, which has $20 billion of real estate assets under management, will also invest in mortgage bonds and loans sold by other investors through the fund. About half of the fund’s money is already committed.

Other nonbank lenders are gearing up funds to take advantage of the changing apartment market, including Madison Realty Capital and the Carroll Organization, as borrowers need to refinance or secure more financing at higher rates.

“We think we’re going to be in a higher rate period for a longer period of time,” Litton said.

The commercial real estate sector has come under pressure as the market has shifted, with prices on those properties falling 13% in 2022, according to Green Street. But Litton says he expects apartment bets to fare better as higher mortgage rates push more potential homebuyers into the rental market, keeping demand for units in those buildings high.

“Fundamentals are very good,” he said.

To contact the author of this story: John Gittelsohn in Los Angeles at [email protected]

© 2023 Bloomberg L.P.

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