PROFILE: Wharton Equity Partners

By Keat Foong, Executive Editor

Peter Lewis, chairman, president and founder of Wharton Equity Partners, has seen several real estate cycles. So does he have any predictions for the current one? “I can write the next 18 months with a great degree of certainty,” says Lewis. “Capital is starting to move to the secondary markets.”

Lewis follows his own advice. Wharton Equity Partners, which was founded in 1987, is concentrating on securing a toehold in secondary and tertiary markets as investors crowd the “sexy six” and other primary markets and bid up the prices in those locations.

Many secondary markets today are overlooked, says Lewis. For example, Michigan is seen as a relatively undesirable real estate market in which to invest. However, that opinion may be largely influenced by the perceived distress of the Detroit market, says Lewis. And there are in fact plenty of other markets in Michigan that for a variety of reasons are very promising‑for example Ann Arbor and Bloomfield, he says.

Wharton Equity Partners recently acquired nearly 1,500 units in multifamily properties, and it is in discussions to purchase another 2,000 worth of multifamily units, says Lewis. Secondary real estate markets that are favored by the New York-based firm include ones in Florida, such as Tampa and Orlando; the Midwest; and the Southeast, for example Charleston, Savannah and Raleigh, N.C. With a portfolio of about 1,500 units, Wharton Equity Partners makes value-add investments as both an investor and developer.

As capital returns to the secondary markets, “it will go after the best opportunities first, and ultimately drift down to the Class B products,” says Lewis. Lewis believes he is only eight to 12 months ahead of the cycle before institutional capital begins to flow into these markets.

In fact, the ability to forecast capital availability is key, and one of the most challenging aspects of playing the commercial real estate game, in Lewis’ view. “You want to buy in a market with less liquidity and sell when liquidity pours into those markets.” And institutions tend to be slower moving and “late to the party.”

Lewis is of the opinion that multifamily will underperform in four to eight years’ time, so the firm is generally planning to hold its assets for three years. Lewis seeks IRRs in the high-teens for properties that are purchased today. Of course, there are plenty of pitfalls in secondary markets. For example, “You have to be careful in secondary markets that you buy really great assets, next to hospitals or universities, and not an asset that is furthest out of town,” he cautions.