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By: Bailey McCann, Private Equity Strategies

Private equity has been booming for the past few years, but record distributions back to investors have left many LPs with cash to burn. In this environment, private equity real estate funds and other real estate investments are becoming more popular. Institutions, family offices and individual investors alike are looking for income generating investments and real estate can be one option.

New York-based Dome Equities, a $1.27 billion private equity real estate firm is making a big bet on multi-family properties. Construction of multi-family units has been spotty this year, a recent Commerce Department report showed permits for the segment unexpectedly dropped in September. But permit numbers can vary month-to-month and some analysts expect numbers to start going up again in the fourth quarter.

“One of the dislocation points in the market is that the supply side is not delivering enough rental units so there is scarcity, which impacts rental prices,” says Eric Jones, CIO at Dome Equities. He says that a combination of demographic factors are likely to keep demand for multifamily units strong even if there are episodic drops in permits for new buildings.

Why is that? “We’ve seen that the group of people who are primarily renters has grown significantly since 2008 and we expect that trend to continue,” Jones says. “Millennials are buying homes much later in the life if they are buying them at all. Others have discovered that home ownership doesn’t always work out.”

Millennials have also been flocking to cities in favor of a lifestyle less dependent on long commutes that are common to the suburbs. Cities often hold better job prospects and other benefits that appeal to this age group. As a result, Jones says, cities like Atlanta, Denver, Nashville, and other mid-sized cities are having to ramp up production of multifamily rental units considerably in order to meet increased demand. Jones says occupancy rates are up nationwide which can mean higher rental prices - a boon for investors in properties.

“We see this as a trend that will continue for at least the next five years,” he adds. Dome’s strategy for finding investable properties centers on these growing markets. Jones and his team rely on financial models that rank local risks against local demographics in order to find the strongest targets. Unlike developers that only want to start fresh, Dome will also invest in properties that need updating or repositioning . The investment team then engages a partner network to update those buildings and make them available as rental properties.

As an example of its turnaround strategy, earlier this month, Dome acquired Vista Pointe, an institutional grade apartment community located in the Valley Ranch master-planned community of Irving, Texas.The community was built in 1996 and consists of one, two, and three bedroom units. Dome plans to update the 20-year-old apartments with new interiors and fixtures and will work with a Dallas-headquartered multifamily operator to manage the property.

“Irving is a diverse, strategically located city in an above average growth metropolitan area. Managerial and professional service growth are leading this economy on the back of a number of major corporate relocations,” Jones says by way of explaining the deal. “A high concentration of corporate headquarters, technology businesses, banking, distribution infrastructure, and above-average population growth are leading sectors longer term.”

For properties like Vista Pointe, Dome’s average holding period is 3-years while the building is updated. The modest holding period makes for a relatively dynamic portfolio compared to other private equity strategies. Looking forward, Jones says he expects to see this opportunity set remain strong, potentially expanding to more mid-sized cities as more people opt to become lifelong renters.