Industry Roundtable: High-Caliber Operations

Institutions are buying more multifamily—and applying long-tested strategies to achieve ROI.
Image Lux 24 by David B. Seide

Image of Lux 24 by David B. Seide

While institutional investors have long been attracted to the office sector, multifamily is luring them in with the prospect of even more consistent returns as U.S. homeownership rates continue to drop. MHN asked leading institutional investors and advisors what they look for.

MHN: Generally, how do you distinguish institutional-caliber multifamily communities from other kinds of multifamily?

Julie Smith, Chief Administrative Officer, the Bozzuto Group

Julie Smith, Chief Administrative Officer, the Bozzuto Group

Julie Smith, the Bozzuto Group: The difference is generally in the investment strategy. Institutions typically would have articulated investment hurdles tied to a specific hold period. They tend to target certain types of properties—based on their investment strategy—in proven or emerging markets to achieve these goals.

Rick Graf, President & CEO, Pinnacle

Rick Graf, President & CEO, Pinnacle

Rick Graf, President & CEO, Pinnacle: In most cases, institutional investors are looking at multifamily properties less than five years old, many in new buildings. These properties must be highly amenitized and have high walkability scores, and LEED is becoming more popular.


Bob Faith, Founder, Chairman & CEO, Greystar

Bob Faith, Founder, Chairman & CEO, Greystar: We like to see a unit count of 100 or more in order to realize the full benefit of our on-site property management team. We examine in-place rents alongside submarket comparables and overall average market rent to determine asset quality. We also consider the location and depth of the market, and if there is sufficient liquidity to suit our investors’ needs.

MHN: How do you operate a multifamily community so that it attracts institutional investors when it’s time to go to market?

Smith: Professional, reputable and effective management is critical. They need business partners who understand the investment strategy and can execute on the plan.

Ella Shaw Neyland, President, Steadfast Apartment REIT

Ella Shaw Neyland, President, Steadfast Apartment REIT

Ella Shaw Neyland, president, Steadfast Apartment REIT: Steadfast’s integrated asset strategy provides a strong foundation of management, leasing and operations fundamentals and guidelines that help maximize rental income and control expenditures, all of which are advantageous to how a property is viewed by a prospective buyer.

David Scherer, Co-Founder & Principal, Origin Investments

David Scherer, Co-Founder & Principal, Origin Investments

David Scherer, Co-Founder & Principal, Origin Investments: The No. 1 rule is to treat every building like it’s a company, with a top and bottom line. It’s important to understand where your asset falls in the ecosystem by asking: What is its competitive set? What are its constraints? What can I change, and can’t change? If I can change, what makes economic sense?

MHN: What do institutional investors expect when they look to acquire a rental property?

Faith: Generally, institutional investors will look for assets of sufficient size to meet the volume of equity that they are seeking to deploy.
Neyland: A must-have for most institutional investors is the ability to quickly achieve critical mass in a market. For this reason, Steadfast utilizes a clustered-diversification approach that seeks to achieve diversification while also benefiting from economies of scale and the formation of local portfolios that may improve marketability to prospective buyers.
Smith: The product must be competitive and relevant during the projected hold period. Obsolescence and general property condition are always concerns. Operating efficiencies are also a consideration. A property that is too small and expensive to operate may not be an ideal choice.
Graf: Those looking for urban properties are typically looking for high-rises, and those developers are often developing with an institutional buyer in mind. Smaller, local operators are looking at older properties, but they must meet a stringent list of characteristics.

MHN: How does the volume of new product in the pipeline influence operating strategy for existing properties?

Smith: Older properties need to either renovate or repurpose old amenities into newer, more popular amenities. For instance, older theater rooms are being converted into fitness theaters, business centers into conference rooms. If a property is not able to compete on product and service, it will very likely compete on rental rates and will lose position in the submarket.
Faith: We work with each owner based on their specific goals and then execute the plan that the owner has decided upon. Some owners invest more capital to keep communities competitive with new supply.
Graf: Operating costs are higher for core product, particularly in staffing. Generally, we have one staff member for every 100 units in the office and one in maintenance. But as we deal with more high-rise luxury properties, that metric no longer works. We need more staff, and they need to be attuned to technological advances in the industry.
Neyland: Steadfast believes that if you provide residents with convenient access to all facets of the live-work-play lifestyle, they will stay as residents for longer. Given that over 80 percent of the new product that has been delivered recently is considered luxury product—with a monthly rent to match—we maintain a competitive edge by buying quality, middle-market properties and making selective upgrades that bring many of the modern amenities residents seek at a price point that is affordable.
Scherer: But to receive the right ROI, you have to understand the ability and willingness of the tenants to pay. If you’re over-improving a multifamily asset in a place that can’t support those type of rents, it won’t work.

MHN: What investment strategies do you use to keep properties of varying ages attractive to residents and competitive in their markets?

Smith: Location never gets old. Nor does really good design. We find our properties that are thoughtfully designed and in great locations with exceptional site plans, landscaping, maintain very competitive positions regardless of age. Access, visibility and environment are timeless attributes.
Scherer: You don’t want the building to be surrounded by a large amount of new supply. One of the reasons cap rates are lower in certain markets is because there’s the belief that supply is constrained. Institutional investors want cash flow over time, so you have to prove there’s growth, demand and rising rents.

MHN: What upgrades are you making?

Graf: In properties five to 10 years old, we’re upgrading bathrooms and kitchens, lighting, appliances, countertops, and changing out carpeting to wood or faux wood flooring. Older properties—ones that are 10 to 15 years old—often require heavier upgrades, such as in the electrical and HVAC systems. We’re also adding technology to these buildings.
Faith: We often see properties that are more than 15 years old with smaller, more compartmentalized spaces within common areas. As a result, we may remove walls to create more open spaces. For five- to 10-year-old communities, we generally focus on smaller upgrades that help refresh the existing design.
Scherer: You’re trying to save money without having anyone notice. In older buildings, you can typically do that in common areas at economically viable prices, such as changing the aesthetics through new furniture, opening walls or removing unnecessary drop ceilings. Amenity packages should be as current as possible. If a building doesn’t have a pool, you’re not going to add one, but you can modernize the fitness facility or create a dog-walking area. You never want to cut costs and create a lower perception of value. Nor do you want to spend so much you don’t get a return on investment.

MHN: What do you consider to be the pros and cons of outsourcing property and/or asset management services? What is
your preference?

Neyland: Except in a few instances, Steadfast chooses to utilize its in-house team of property and asset management professionals. We believe our in-depth experience, deep industry relationships and market knowledge allow us to consistently evaluate market trends, optimize performance and readily respond to and capitalize on changing market opportunities. Having our asset and property management teams involved from the very beginning of the investment process helps assure alignment and sound investment planning from site selection through disposition.
Faith: Sponsors that outsource these critical services lose some control over the investment. This requires a high level of trust for the service providers in the areas that they outsource.
Smith: Bozzuto and our partners have enjoyed the benefits of our fully integrated platform, with development, construction, property management and asset management all under one roof. That has resulted in a wealth of experience, collaboration and creativity that is reflected in every one of our communities. In the absence of these skill sets, it does make sense to outsource them.
Scherer: Origin always outsources property management and leasing teams in value-added properties, as we’re an investor that believes in alignment and wants separation of functions. Our asset management team holds them accountable, and that ensures they’re delivering what we want. Ancillary revenue from in-house property management and leasing can skew a fund manager or GP’s view of the investment strategy, so you don’t want any conflict of interest. … By partnering with the largest property management and leasing firms, you have the benefit of economies of scale that you wouldn’t have in house; for instance, you can negotiate the best contracts and have greater buying power, nor do you have to worry about building out extra internal infrastructure.

Graf: All of our institutional investors keep asset management in house and outsource property management. Sometimes we’ll get involved on the asset management side for smaller investors, especially since property management and asset management are not as clearly distinguished as they used to be. Hiring a third-party property management firm also allows for better scalability and less risk—you don’t have to deal with hiring the right managers, and liability associated with employees is in the hands of the third-party manager.