Avalon Bay Closes Fund

Avalon Bay Communities, Inc. (AVB - Analyst Report) announced earlier this week that it had closed an investment fund with total equity commitments of $400 million. The fund will have an investment capacity of about $1.1 billion. AVB committed $125 million to the fund with institutional investors kicking in the rest.

The company announced in its press release that a new institutional investor has committed $75 million and an existing investor increased its investment by $17 million. The fund will invest in multi-family projects throughout AVB’s core markets. The fund was started in August, 2008, and has not yet made any investments.

Institutional investors have been curtailing their real estate investment allocations. AVB’s ability to raise investment capital in this type of environment is a positive sign that investor interest is coming back into some sectors of real estate. Fundamentals in multi-family, like other real estate sectors, continues to deteriorate, and property values are falling. Although, multi-family has a distinct advantage over office, retail and industrial -- from Fannie Mae (FNM - Snapshot Report) and Freddie Mac (FRE - Analyst Report), who are still active in apartment financing.

It is probable that there will be some good distressed buying opportunities in 2009. As such, we expect more institutions to jump back into real estate.

Cap rates are increasing across all sectors, which makes investing much more profitable. Companies that can raise money and have cash will have an advantage. In this capital-constrained environment, we expect more REITs to try to use the JV [joint-venture] or fund format to purchase real estate going forward. We view this as a positive -- JVs require less company capital and increase returns through fees and promote income.