Bill Ackman made news recently when Pershing Square Capital Management increased its stake in Howard Hughes Corp., a commercial real estate developer with a strong focus on multifamily. The wily investor draws a lot of attention and his signal of optimism and the multifamily market is no different. Interest from the institutional class isn’t new—the sector witnessed recording breaking private equity capital raising in 2019 and the start of 2020—but it is growing and here are a few reasons why:
Short-term resilience with long-term stability
Real estate is an alternative asset class and it’s an inflation hedge. The multifamily sector has proven to be more dynamic and resilient, particularly in the pandemic, relative to other CRE sectors. This has made it increasingly attractive to investors, especially as inflation expectations are growing among some in the market.
And this is echoed over the long-term as well. When you look back over time with the NCREIF Property Index, you can see that multifamily has generated attractive risk-adjusted returns over the past several decades. It’s a good leading indication that it’s a safe, defensive, income-producing type of investment, which appeals to hedge funds and institutional investors.
Solid fundamentals with fungibility
In addition to a strong track record, the long-term fundamentals are in place to make multifamily a strong investment strategy over time. The home ownership rate over the long-term is probably going to be lower than higher. At the same time, we’re seeing a growing appetite for greater mobility and flexibility when it comes to living arrangements, leading to a greater desire to rent versus own. At the same time, the multifamily market is still undersupplied, without a clear indication of supply will meet up with demand, so absorption will remain strong.
From an ownership perspective, the shorter-term nature of multifamily leases allows greater fungibility. Multifamily rents can be recast more easily than office rents, for example, where renters are locking in rates for 3, 5, 7, even 10 years.
Increasing comfort with the asset class
Hedge funds have typically used REITS as their real estate investment vehicle, but they’re getting more comfortable with owning hard assets themselves, especially as REITs are seeing their stocks trade at a discount. Some hedge funds moving, like Paulson & Co., are moving to a family office model, creating a different investment vehicle ripe for the ownership of real estate.
A shift is underway, but it won’t be without challenges. The biggest challenge for hedge funds moving into the space will be speed of penetration. While it’s likely that they’ll hire experienced real estate professionals to execute their real estate investment strategies, there will be a ramp up period associated with this. In the meantime, hedge funds will be looking for partners to help them source the acquisition opportunities, bring in additional financing, execute sales, etc. In the short-term, they’ll be looking to partner with experienced sponsors in the space who can execute the strategy on their behalf and utilize their capital, enabling them to move more aggressively into real estate. (This is where Berkadia can play an integral role!)
It’s an exciting time for the multifamily market as the broader investor market – from institutional capital to private equity to hedge funds – takes greater notice of the asset class and it becomes a strategic piece of a diversified portfolio in its own right. And opportunities abound, with the rise of single-family rentals and environmental, social and governmental strategies (ESG) in the space, to name a few.