N. Va. Real Estate Firm Closes its Third Fund. Here's How it Wants to Spend the Money

WBJ

By Tristan Navera

American Real Estate Partners has raised another $63 million to bolster its real estate work.

What's it going to do with that? Well, it's all about the data. And data centers.

Brian Katz, co-founder and president of McLean-based AREP, said the strategy for AREP Strategic Opportunity Fund III includes developing data centers and multifamily and acquiring logistics facilities. But a spike in interest rates to tame inflation, among other difficult economic conditions, gives it pause on office properties, which had been a core use of its past two funds.

"In addition to interest rates and a possible recession, there are numerous macro conditions that are constantly changing, so we will remain highly focused on what the data tells us," he said. "We know that many employers and workers across the country are still determining when and how to return to the office full-time, so we will continue to monitor back-to-office trends before we take more action in the office sector."

AREP, which has deployed more than $5.1 billion into projects over time, accrued the new commitments from an undisclosed number of investors, including a "significant number of high-net-worth individuals," and the company said it plans to use the money as co-investment capital to supplement its own funding. A filing with the Securities and Exchange Commission from June showed a minimum investment in Fund III of $100,000.

As a pooled investment fund, AREP uses the capital, among other funding sources, to make acquisitions with more favorable terms and returns. In this case, AREP will use it to invest in $1.5 billion to $2 billion of real estate in joint ventures with other institutions. As for property type, it's thinking "value-add" properties, which are older or off-prime properties that can be bought and upgraded for an upside to rents.

AREP says it's looking at urbanized and suburban markets along the East Coast. About 30% of the new fund will be directed into the $1 billion joint venture it formed with Harrison Street Real Estate Capital for data centers in Loudoun County, plus a residential project with Westbrook Partners.

Data centers remain lucrative regardless of the economy's strength, which drove AREP's foray into that market. Even with the Harrison Street development, which will include six new data centers topping 2.1 million square feet, Katz said the company is still in the "early innings" of what he believes is a continuing boom.

The Fund III dollars should be invested in 12 to 24 months, but with the economy as it is, AREP isn't building timetables. It doesn't have a specific property mix in mind either, choosing instead to think opportunistically.

"We are not in a rush to deploy the funds capital and are quite happy to sit back and pick our spots," Katz said.