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Apartments Serve a 'Basic Need:' Greystar Founder Bob Faith On Why Multifamily Cycle Still has Legs

Apartment Pioneer on the Benefits of Greystar's Fully Integrated Business Model, International Expansion and Why He Favors Anything that Restricts 'Exuberant Excess' on the Part of Investors
November 9, 2016
CEO Bob Faith has the built Charleston, SC-based Greystar Real Estate Partners into one of the largest US and global apartment companies.
CEO Bob Faith has the built Charleston, SC-based Greystar Real Estate Partners into one of the largest US and global apartment companies.
Hard to believe, but there was a time not so long ago when apartments were not considered the major property type in the commercial real estate sector they are today.

In 1993, when Bob Faith founded Greystar Real Estate Partners, institutional investors were just beginning to eye the investment potential of the rental housing sector, and they liked what they saw. Faith tapped into that investment trend in a big way.

Today Greystar has grown into the largest manager and one of the largest owners of apartment communities in the U.S., with over 400,000 units under management in more than 160 markets.

If Faith's career path had aligned with his undergraduate degree in petroleum engineering from the University of Oklahoma in the early 1980s, he might well have ended up in an industry that's been in retrenchment since late 2014, when oil prices began to crater. But the market for crude oil also tanked during the '80s, prompting Faith to earn an MBA from Harvard Business School.

Like legions of development pros, Faith began his career in real estate in 1986 with Trammell Crow, serving as a partner in the firm's Charlotte, NC office. Along with lodging and multifamily industry legend Barry Sternlicht, he co-founded private investment company Starwood Capital Partners, LP in 1991 before departing to establish Greystar in Houston.

He also founded and served as CEO of Homegate Hospitality, Inc., an early operator of extended stay hotels, with merged with Prime Hospitality Corp. in 1997. At the request of his friend and then South Carolina Gov. Mark Sanford, Faith served as secretary of commerce for the state of South Carolina from December 2002 until February 2006.

This year, Greystar has emerged as one of the most active U.S. multifamily developers and investors internationally, with investments Europe, Latin America and Asia. The company formed an alliance with Macquarie Capital last month to develop projects in Asia. On Oct. 25, Greystar and partner Credicorp Capital closed an investment fund targeting high-quality multifamily assets in Chile.

CoStar caught up with Faith last week to discuss his strategies for continued growth in the volatile commercial and multifamily residential real estate markets.

CoStar: First, regarding your new Asia-Pacific rental housing platform with Macquarie Capital. Do you see this as an example of the strengthening relationship between global institutional capital and U.S. multifamily companies, and are we seeing more offshore institutional and global capital moving into U.S. office and apartment markets?

Bob Faith: It’s a continuation of a trend that started at the end of the most recent global financial crisis. The U.S. recovered faster and international investors really started looking to the U.S. as a beacon of safety, and U.S. apartments were a very steady sector as well. That growth has continued.

Did you think you would be investing in Asia or Chile back when you started in the business nearly 25 years ago?

When we started Greystar back in 1993, apartments were just becoming much more of an institutional asset class. Prior to that, apartments weren’t one of the major food groups of CRE. In the 1990s, institutional investors wanted to have exposure in all the markets of the U.S. and that got us growing in those markets. As we got to know the global investors, we saw in the period post-global financial crisis that there really was an opportunity in the residential sector in other parts of the globe. It’s a natural outgrowth of the business. But no that wasn't part of our original plan. I would have laughed at myself if I thought, 'oh, I imagine I’ll be in Chile in a few years.'

What events or trends sent Greystar into growth overdrive?

I trace it back to the early '90s when the U.S. was recovering from the savings & loan crisis. S&Ls were the primary institutions that were failing at the time, and they had a housing mandate, so a lot of their loan exposure was to apartments. There was recognition even in that recession that the apartment cash flows were not nearly as volatile as other asset classes. Prior to the tax reform act of 1986, large institutions really couldn’t compete in the apartment space because there were these crazy laws that made syndicators the cheapest form of capital for the apartment business. Individual investors could get all their money back in tax breaks, so there was no way for institutions to compete.

In 1986, the S&Ls filled that gap with 100% financing - always a bad strategy, because if you have any kind of dip, everything goes into foreclosure. So when we set up Greystar to focus on institutional apartment investors, we were tremendous beneficiaries of that megatrend.

The period from 1990 until 2008 was a pretty good run for the apartment business and we grew throughout the U.S. The only glitch was the 'tech wreck' of the early 2000s, which was just a quick little recession. In 2008, when everything got hit, apartments again performed really well. Going into the Great Recession, both apartments and office were 90% to 95% occupied. But in the depths of the recession, office occupancies dropped to 82%, whereas apartments only went down to 91% to 92%.

Apartments are a more basic need, a roof over people’s head, versus office, where companies vaporize and office needs just go away until the economy starts growing again. That just drives home the fact that apartments are a very steady sector that lacks volatility, which is really attractive for long-term institutional owners.

All types of investors have jumped onto the apartment bandwagon in the last few years. What’s your approach for continuing to grow the business as the field gets increasing crowded with new players?

One benefit of our business model is that we’re a fully integrated business with three legs to the stool. We have our property management business, in which we’re managing properties we own and we earn fees by managing assets for large institutions. We also have our development and investment management businesses. Each of those three businesses have different timing paths in the cycle. Property management has grown every year since we started in 1993, even during periods like the 2008 recession, because banks are taking back assets or assets aren’t performing, so they bring in new managers.

Once you get through those downturns, development becomes an opportunity, and acquisitions allow the management business to grow. It’s just a very steady cash-flowing business. The development business, which is the other end of the extreme, is very volatile, so there are times like now when you build a lot, but there are times when we won’t be building a lot. We're able to keep our teams together and repurpose our development people so we can respond quickly to the market.

Does the U.S. apartment expansion still have legs? Are you surprised that multifamily fundamentals are so strong in spite of the largest supply wave since the 1980s?

We’re in a period where the easy, early-cycle deals have been done and we have to be more selective because construction financing is getting more difficult, and construction costs continue to go up while rents are leveling out in the high end of many markets. We're naturally going to see volume on that side of our business go down.

We continue to have a housing shortage, which is why it will continue to be pretty good time to be in apartments. There will be a bubble of oversupply in certain submarkets, and Class A rents will pause, concessions will come and supply will slow down because deals won’t pencil anymore. But eventually, that new product will get absorbed.

Markets like Austin got a burst of supply very early, but demand continued to be very strong and there were concessions and things got a little sloppy. But they got leased, and it's started growing again. As long as the underlying growth continues, you can work through these little supply bubbles. There will definitely be periods of flat growth, but it’s not the beginning of the end, or the beginning of a multifamily crash.

On the other hand, we continue to acquire assets. One of the great things about the apartment business is even though we’re the largest company with 420,000 units; our market share is relatively tiny. There are 26 million apartments in the U.S. so it’s a very fragmented marketplace, which means there a lot of mismanaged assets by mom-and pop-owners, where we can come in and put our technology and purchasing power in place and add value on the margins. That part of our business continues to be very steady and we continue to see opportunities. As we go through the cycle, different parts of our business will guide us. We call it an evergreen business model, the fact we have a strategy in each sector.

With record low interest rates and rising apartment rents, we’re beginning to see apartment dwellers coaxed out of higher-end rentals and into the single-family housing market as the gap between renting and buying narrows. Do you see this trend continuing?

It’s hard to speak at a national level because it's all about submarkets. But we do track reasons for move-outs across our whole portfolio, and I can tell you we have not seen a material increase in the reasons being given to move out and buy a home. Post-global financial crisis, of course, it was really, really low because no one was buying homes. It got back to what we call a normal level several years ago, and we really haven’t seen it change.

I’m not seeing that in any markets, beyond the normal. You’re always going to have renters, for us, the 20 to 35 year old segment, which has a 65% propensity to rent an apartment. That's the inverse of the country as a whole on home ownership.

We see that people rarely make the decision to buy a home rather than rent a home because of some capital markets decision. Renters usually move because of a lifestyle change, or as we say, they age out, meaning they’re age 35, 37 and just had their second kid and they want to get married or move to a bigger home with better schools. It’s usually a lifestyle change.

We’ve seen some factors that make us even more of a ‘renter nation' than it would normally be. You need to have a 20% down payment to buy a home. Most kids coming out of college have a bunch of college debt and don’t have that down payment. That’s leading to longer stays in renting. People are getting married later and having kids later. The last thing is the expectation of millennials of where they’re going to live. Versus our generation, they’re going to have four or five different jobs in their life, and that tends to delay the home ownership decision. Those sociology factors aren’t going to change.

What types of markets or geographies and product types are you bullish on at this point in the apartment cycle?

One area we’re particularly focused on right now are markets that have underlying growth but where new supply has created a high water mark for rents, and there’s a huge gap between Class A and Class B product. In Seattle, for example, there’s a lot of new product delivered at rents much higher than the rest of the market. That can trigger a rent wave, like if you threw a rock in the pond downtown. Those waves ripple out to the outer areas and owners start charging more for the Class B to close that gap. We're looking to exploit that gap around the country with our value-add fund.

There’s plenty of opportunity for us to buy good assets that maybe aren’t operated well and we can put in place our tech, people and purchasing power and win more NOI than owners who are asleep at the switch. There are also still development opportunities out there, but they're harder to buy and get construction financing for. You have to be very thoughtful about new supply and what you will be competing against.

Does the tightening market for construction financing and banks and institutions being more discerning about the types of deals they’re going to underwrite concern you at all?

No, I think it’s great (laughs). Anything that restricts exuberant excesses is a good thing. That’s when we get into trouble when we create supply bubbles. Anything that can reduce excesses and the potential for bubbles is a good thing in the long term of our industry. I’m not someone who’s seeing gloom and doom. We’re going to have to be thoughtful and we’re generally steady as she goes.

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