Interview with Robert Faith, CEO, Greystar

Robert Faith, CEO of Greystar Real Estate Partners LLC, founded the company in 1993. In 2011, NMHC ranked the Charleston, S.C.-based company as the nation’s largest apartment manager, with over 187,000 units in its management portfolio (up from nearly 154,000 the year prior). Faith talks to MHN News Editor Jessica Fiur about how Greystar got to where it is, the importance of acquisitions in the multifamily industry and his forecasts for the future of real estate.

How did Greystar get to the top as the nation’s largest apartment manager?

We have continued to invest in our platform, which has allowed us to expand our market share with a lot of our existing clients. Perhaps we didn’t manage as many of their properties across the country as we would have liked since we didn’t have a presence in all of those markets, but we continued to invest in great people, and that has given us the capacity to be able to grow with a lot of our clients.

I think you are seeing an ongoing consolidation in the industry, where a lot of the big buyers are getting bigger and buying more properties. For a business like ours, where 90 percent of our portfolio is third-party managed property, it’s pretty important that we’re buying, but it’s even more important, as far as growth [to ask], “Are our clients buying and building?” And they are. You keep growing if more is coming in the front door than is going out the back door.

What is the importance of acquisitions in building a portfolio? What were some of your most important acquisitions, and why?

There’s a couple of different ways we can talk about acquisitions. For us, acquisitions of smaller property management companies have been an important part of building our overall platform. Three years ago, when we bought JPI’s property management business, it gave us a platform in the Northeast, California and the Pacific Northwest, where we didn’t really have a footprint before. This then allowed us to continue to grow. Since we bought the property management arm of Archon, we bought a small Pacific Northwest company called Glacier, which added to our presence in the Pacific Northwest. For us, acquisitions of culturally compatible business that add to our regional platform and scale is an important way for us to grow. But it’s really critical that they’re culturally compatible. It’s really important for us that we’re buying organizations that adhere to our standards of quality and the type of people, integrity and character that we want our culture to embody.

When you’re talking about acquisitions of individual properties, that really is a very important part of our growth for our clients. Some years they’re going to be buying, and some years they’re going to be selling, so the years when they are net buyers versus sellers, that’s obviously an opportunity for us to grow. To a certain extent, for our own investment partnerships, we’ve been acquirers of properties over the last year as well, so that’s contributed to our overall growth.

What are the standards that have to be met before an acquisition?

There really aren’t that many property management companies that trade every year, so I wouldn’t say it’s hundreds of acquisitions that come across the plate of property management businesses—it’s typically going to be driven by relationships. Maybe we have similar clients, maybe we know each other from past companies—either key employees or key principals. It’s not a roll-up consolidation story where I’m going to buy three companies a month; it’s more of a chip here and there sort of approach for the acquisitions of companies. And then, as far as acquisitions of properties, we have clients that buy everything from a foreclosed property or buy from a special servicer, to open-ended core funds that are buying core properties in the best locations in the best markets. There are clients that are a little bit different for their property acquisitions.

Where do you see the most growth opportunities in the future?

It’s a couple of different things. I believe there’s going to be an on-going consolidation of the apartment business. I think that economies of scale in our business are such that the big are going to get bigger—that competitive advantage you have as you achieve certain scale markets is just going to be harder and harder for the industry to ignore. What that means is that ultimately the property management businesses have a quantifiable advantage because of everything from technology to purchasing power to the economies of scale. If we can accommodate building x and drop more revenue to the bottom line, then a lot of other companies can operate that building x. The sophisticated property owners are looking to maximize their cash flow, and I think that’s going to continue to create a big growth opportunity. I would say, in general, the whole multifamily space is going to continue to grow as you see a bit of a change in the U.S. consumer and in their mentality about owning a home vs. renting. I really do believe this is a circular change, and that you’re just going to see a lot more staying power in the rental business over the next 10 years or so. It should be a very good time to be in our business.

What internal programs within Greystar have yielded the most ROI?

I would say that probably some of our investments in our technology platform where we are really doing our best to be at the cutting-edge of utilizing everything from our revenue managing program, to expense technology, online buying and our national buying programs. It’s really been the investment in the platform that has given us tremendous ROI.

The other thing is, it’s all about the people. The best [strategy] is always going to be having that person in a local market that really knows that market cold. When you think of where your ROI is, when you make great hires—and have great people—that’s ultimately where you have the best return on investment.

What challenges do you foresee in the future—for your organization and for the apartment industry?

The most valuable component of the business is the people—that really also is one of the challenges to the industry. We are an industry that has historically been more of a mom-and-pop business compared to the commercial side of the business. Now, with the ongoing increased institutional ownership of our business, and the demand for professionalism for financial reporting systems, I think that one of the challenges for our industry is going to be able to keep up and train and educate the people in our industry and draw people out of other industries who can thrive in the type of environment that our industry has. It’s not going to be walking in and someone handing you the keys off of a pegboard to go look at an apartment. Today, you’ve got your cell phone and you walk up to a building and you want to hit an app and figure out what units are available. That takes a different infrastructure, it takes a different kind of person and organization to bring that level of sophistication to our business than what we’ve had.

I would say there’s another challenge for our industry. Although the supply and demand fundamentals are very good, and we’ve been able to see rent increases across the country, I think the recovery is going to be very spotty across the country based on where you see job growth and income growth. One of the challenges is that everyone likes the forecasts that rents are increasing forever, but at the end of the day you’re going to have corresponding income capabilities of the residents to pay those increased rents, which means they have to have confidence in their jobs and the economy, and they have to be getting raises and promotions for that to happen. We’re sitting here in a recovery that sure feels like a bit of a bumpy road, and I do think that’s going to have a big impact on how we’re going to recover as an industry.

Have rents reached a ceiling, or will they continue to rise?

I think it’s been an interesting cycle where really all of the markets went in the tank pretty much at the same time, and the depth of how far rents plunged was really differentiated by the markets that had a huge component of their economy made up of the single-family home construction business. What I think you’re going to see is spotty recovery across the country, and by that I don’t necessarily mean things are going to go negative again, but I think that the velocity of growth from here is going to be dependent on those areas where you see jobs and income growth and household formation really excelling. What you’re seeing is, across the country there are pockets where there are jobs being added.

You’re going to see a lumpy recovery. The markets that don’t have that job growth, you’re going to see slower recovery—it’s still going to recover but it may recover slower and may cap out sooner than those markets where you’re seeing little pockets of job growth and mini economic booms. So while everything went in the tank at the same time, getting it back is going to be different, depending on the local economy.

Any other forecasts for the market?

I think the recovery of development volume is going to be slower than perhaps we thought months ago. I think you’re seeing the lending community be a bit cautious about how much new supply it sees coming back. I don’t really see supply-driven issues on the horizon—yet. I’m sure over time it will happen. It always does.