Green Cities fund brings new life to Gerding Edlen

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Molly Bordonaro said Gerding Edlen will launch efforts to raise a second fund after a successful showing with its Green Cities I LP Fund.

Fresh from raising $183 million for its first-ever real estate fund, Portland’s most-watched green developer will launch a second fund this year.

Gerding Edlen Fund Management LLC, the investment arm of Gerding Edlen Development Co., closed its Gerding Edlen Green Cities 1 LP fund this month.

Molly Bordonaro, senior vice president, said the unnamed second fund will likely launch this quarter and will invest in the same urban infill apartment projects as the first.

“We see a significant play,” she said.

Gerding Edlen launched Green Cities 1 in late 2009 with the stated goal of raising $500 million. The economy derailed that, but observers said the fund is still a success.

Bruce Korter, managing director of Washington Capital Management, called $183 million a remarkable tally for a first-time fund.

“They did that in a period of about three years, starting from scratch. They did a very good job,” said Bruce Korter, managing director of Washington Capital Management.

Fueled by pension funds, insurance companies and endowments, Gerding Edlen invested the proceeds of Green Cities 1 in seven mostly unbuilt apartment development projects to answer soaring demand for rentals in city neighborhoods like ones in Seattle, Los Angeles and Boston.

New life

The fund’s success is breathing new life into Gerding Edlen. The firm faced dark days when the recession dried up demand for its glitzy condominiums, causing it to falter as lenders took control of several projects and equity investors were wiped out.

But even as the firm cut its development staff in half, it was expanding its multifamily management business, increasing its staff to about 50.

CEO Mark Edlen made the shift into apartments as condo sales were falling. Even as the company sold buildings such as the 354-unit Cyan|PDX, at 1720 S.W. Fourth Ave. in downtown Portland, it retained management contracts.

President Kelly Saito said the recession taught Gerding Edlen the value of pursuing the smaller “100-something unit” projects that dominate its current development portfolio. Prior to the recession, it built 300- to 600-unit projects that nearly brought down the business.

“Huge projects hinder your ability to adjust to market conditions,” he said.

Gerding Edlen’s development business now keeps an opportunistic focus on urban infill apartment projects, with a sharp eye toward distressed projects. It targets urban neighborhoods in Portland, Denver, Seattle, San Francisco, Los Angeles and Boston. It has not yet closed a Portland deal.

Edlen toyed with the idea of forming a fund prior to the recession, seeing it as a way to simplify the way Gerding Edlen finances projects.

Since its inception in 1996, Gerding Edlen has assembled a complicated cast of equity investors, banks, mezzanine investors and sometimes public agencies on each project. In 2000, it added institutional investors to the lineup.

A fund would provide it with ready cash to invest as opportunities arose. Edlen said the fund-driven approach gives the firm flexibility to move quickly and use the expertise it has gained in green development.

Emerging from tough times

The recession forced a new way of thinking.

Faced with faltering sales in 2008, it lost at least three buildings to its lenders, including two in Portland. Its equity investors lost an estimated $100 million.

Bob Scanlan, principal of ScanlanKemperBard Cos., a Portland real estate investment firm, lost about $60 million. He said Gerding Edlen was a victim of bad timing, not bad management.

But Scanlan is wary that the red-hot apartment market is ripe for attracting overbuilding.

Developers are swarming, attracted by a national vacancy rate of about 5.2 percent, according to Reis Inc., a New York real estate research firm. It’s even lower in Portland, about 3.5 percent at the end of the year, according to appraiser Mark Barry.

Scanlan fears apartment developers could get burned in 2013 and beyond, just as condo developers were burned in 2008 and 2009.

“Eighteen to 24 months from now, is everybody going to be looking across at one another with more apartments than the world can absorb?” he said.

In Portland, at least half a dozen active developers are proceeding with urban infill projects. Two prominent examples include Mill Creek Residential Trust (formerly Trammell Crow Residential) and veteran developer Robert Ball. Both are advancing projects in the Pearl District.

But the industry sees demand soaring in the foreseeable future. The U.S. home ownership rate is about 65 percent, down from a 2004 high of nearly 70 percent. That’s not expected to reverse itself.

Wednesday, the National Multi Housing Council in Washington, D.C., said renters will make up half of all new households formed in the U.S. decade, translating into 7 million new households.

However, the council cautioned that the economy could be trouble.

“Multifamily cannot sustain its strong growth without overall economic growth,” it said in a statement responding to President Barack Obama’s comments on the housing industry in Tuesday’s State of the Union address

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