Greystar CEO Bob Faith On $4.6B EdR Acquisition And His Outlook For Multifamily
Greystar CEO Bob Faith is bullish on the student housing sector, so much so that his company made a $4.6B bet on the segment with its acquisition of EdR this year. The deal made Greystar not only the largest apartment operator in the U.S., but also one of the largest student housing operators.
From his perch atop the Charleston, South Carolina-based apartment giant, Faith has his finger on the pulse of where the best opportunities are in the multifamily market right now, and what trends are affecting the industry. Faith, who will speak at the Bisnow Multifamily Annual Conference East Nov. 28, spoke with Bisnow about the EdR deal and his overall outlook for multifamily, including the impact of Amazon HQ2 and the Opportunity Zone program. This interview has been edited and condensed for clarity.
Bisnow: You started Greystar in 1993 with 9,000 units and now you have over 480,000 units under management and an investment platform managing $31B. How have you grown Greystar to such a massive scale? What has been the key to that success?
Faith: Well I think a lot of it has to do with the tailwinds of the institutionalization of the multifamily sector, first in the U.S. and now the same thing is happening globally. One of the megatrends of the world is urbanization. Everybody moving to the city, and multifamily is a huge component of that. A decision we made early is to try to be a blue-chip, institutional-quality company that focused on rental residential. It was a combination of luck and megatrends and an equal part of keeping our nose to the grindstone and continuing to push. It's a lot like a flywheel, you push and push, and after a while you build momentum that helps you keep growing.
Bisnow: How much has the multifamily industry changed in that time? Is the basic strategy still the same or have there been fundamental shifts?
Faith: When [Starwood CEO] Barry [Sternlicht] and I were buying apartments from the RTC and the Savings and Loans bank, the apartment operations were really mom-and-pop, just a completely fragmented industry. You couldn't have the same company manage your properties in Houston and manage them in Phoenix. It was really fragmented. When I got out of business school in the '80s, going to work in the apartment industry was not the cool, sexy part, it was high-rise office and retail. Multifamily was just a lot more of a mom-and-pop industry with not as much professionalization. When you think of what we've seen, a massive flow of institutional capital into the space, which brings with it a massive upgrade of the talent and skill levels and the technology required in the space. Today, there's sort of parity with skill sets and professionalism of apartment as office and retail. That's a change that happened over the period of time since I started.
Bisnow: You acquired student housing giant EdR for $4.6B this year. What led you to make that acquisition and what about the student housing sector is so attractive?
Faith: Well, we've really been in the student housing business since 2009 when we acquired JPI and they had a student housing arm. We were operating student housing as a third-party manager since that time. We really got into the ownership and development side internationally before domestically. In 2012, when we went to the U.K. and opened a London office, the U.K. was really recovering more slowly than the U.S. from the global financial crisis. We went to the U.K. and bought a big portfolio of student housing. Now we're the second- or third-largest owner in the U.K. We got to that size and scale in the U.K. compared to what we were in multifamily in the U.S., where we're one of the largest owners but we were kind of only a third-party manager for student housing. We talk about having three legs to the stool: development, investment and property management. We only had one leg in the U.S. — property management — for student housing.
What we realized, and what I found intriguing about EdR, was with them and ACC, the other public company, those two did the vast majority of university partnerships to privatize student housing on big universities in the U.S., which is a fantastic business. One of the compelling things about acquiring EdR was their track record and history and pipeline of student housing redevelopment and new development in partnership with universities. They were a public company that was a little stuck, their stock price was down and they weren't able to raise new equity or grow.
One of our strengths has been the ability to have global investment partners support our strategies. We said this is a great opportunity not only to beef up our student housing in the U.S., it's also to augment our investment capabilities in the U.S. in this niche of public-private partnerships with universities and continuing to invest in acquiring and development adjacent campus opportunities. That's what led to getting focused on it, and we were blessed to be able to get the deal done. We closed it 30 to 45 days ago, and we're really excited about what that does. Now we're one of the largest operators of student housing and one of the largest operators of multifamily. We've learned over the years having scale in a segment brings with it enormous advantages. You can attract the best talent, have a lot more support, have specialists in the business help you be better. You can afford the best tech and keep reinvesting. That's why we're excited to be able to be in scale in that segment.
Bisnow: Does student housing represent a stable asset class in a recession? Students are always going to need a place to live. Is the acquisition a way of preparing your portfolio for a potential downturn?
Faith: Yeah, it's the reason why I've been really focused on rental housing of all sorts is because of the stability of the sector. I got my start at Trammell Crow building offices and warehouses. In the early years of Starwood, we were buying land, hotels and multifamily. But I've stayed focused on rental residential because of that inherent stability. That's a lesson of the early '90s, when we were buying apartments, every market was in a recession. There were empty office buildings left and right. The great thing about apartments is you can always fill them up. People need a place to live.
What we've seen with student housing, it's almost countercyclical. During the global financial crisis, enrollment went up, people went back to school to improve their skills or change their focus to get a job. The sector is not without headwinds and concerns about the internet replacing universities and everybody will get online degrees and people won't go to college. I fundamentally disagree with that.
The college experience is so ingrained in our culture. Yes, there are certain for-profit, small, liberal arts colleges that will be hurt by some reduction, but I firmly believe big research universities, state universities, places that offer the whole university experience, they're continuing to grow and will continue to be successful no matter what part of the cycle we're in. That's definitely the bet we're making. We believe it shares a lot of the stable characteristics that we see in multifamily.
Bisnow: How close do you think we are to the next economic downturn?
Faith: I think about it differently than maybe a lot of people think about the business cycle. If you look back at my career, there were only two major events where every market went in the tank: the S and L crisis of the early '90s and the other was the global financial crisis of 2008. What is much more normal is rolling regional recessions around the world or country, where you have Texas oil prices up or down and the region can suffer. In 2001, tech economies slowed down, but during the same period other parts of the economy and regions were continuing to accelerate because of government jobs, healthcare, energy, whatever it may be.
We're sort of a value investor where everything we're buying, we have a strategy to create value. The big crashes occur because of some event we can't predict. Who knows what that might be, and when that happens, you need to be prepared to ride it out and not be forced to sell at a time when there are no buyers. If you're structured and capitalized in a way you can ride through cycles and be focused on doing investments where you're creating value. I don't stay up at night thinking about whether we're in the seventh or ninth or 12th inning, because I don't know that any of us know. The basic fundamentals are still good. The U.S. economy is growing. We're arguably growing faster than perhaps our normal rate of growth should be, which is why you're seeing the Fed ticking interest rates up. That's because the economy is doing well.
Bisnow: You mention how different regions can be in different parts of the cycle at once, in which markets do you see the most opportunity for multifamily investment today?
Faith: Right now is a period where you're seeing a lot of the country doing well. So we've done really well following the tech companies out of Silicon Valley, which has gotten more expensive, and they're creating jobs in other locations. So the cities where tech people and young people want to live: the Austins, the Nashvilles, the Denvers, the Portlands, the Seattles. Those have been areas that for the multifamily sector have been quite good and I expect to continue to be quite good. Even in expensive Silicon Valley markets, there's still so much demand for product and so little being developed in those markets that we're continuing to do well in those markets, even though it's gotten expensive. The jobs and income created in Silicon Valley continue to be just stupendous.
I think we're all sitting there scratching our heads looking at Amazon going to Washington and Long Island City and saying 'OK, how can we find opportunity in that?' But the thing about it, you look at New York, and there's certainly been more headlines about Amazon locating there, but lost in all that hoopla is Google announcing 20,000 jobs as well. So there's a lot of bright spots across the country today.
Bisnow: What do you think are some of the multifamily opportunities created by Amazon deciding to come to Long Island City and Crystal City? What impact do you see that having on the multifamily market in those areas?
Faith: I think it's actually going to be more impactful for Northern Virginia than perhaps for Long Island City. Because the whole Manhattan-Greater New York City area is so huge, when you throw a pebble into the ocean it doesn't have a lot of impact. I think versus Amazon going to Crystal City and D.C., which has kind of been a little bit overbuilt and you've got the government but needing other big drivers. I think it's going to have a bigger impact on Northern Virginia. It has the ability to change the trajectory for that economy in Northern Virginia and the D.C. area.
There are already tons of great reasons to invest in New York, but it's a little bit more of a kick in the pants for Northern Virginia. There will be all the same opportunities. We already have big exposure in both of those markets. We already have bets on the table with investments we're developing or rehabbing or creating value with, and that's just going to further help the tailwinds of those investments.
Bisnow: You touched on the idea of overbuilding in D.C., which is a concern we have heard from people in that market. Are you seeing across the country a trend of oversupply that could make it difficult to bring up rents?
Faith: I would tell you what we see are the overall numbers don't give me a fear that we are going to move into a supply-driven recession for multifamily, because the demand is still there and growth is still strong, and we're going to absorb all these units. Some challenges are created where a lot of that supply is coming on in very concentrated locations, and when that happens that can create sloppy lease-ups. Because if you have six brand-new projects all dividing up the natural growth in the market, it's going to be more competitive than just one lease-up. That's what you're seeing is weakness that is pretty submarket-specific, and also at the highest end of the market.
It ends up being hard to make broad-brush generalizations. It boils down to supply-demand fundamentals of specific submarkets. But to go across the country, you talk about D.C. and there's been a bubble of supply in the Tysons Corner area, so that's been weak while everybody's stabilizing there. I think there's some areas downtown that have had a little weakness but now are strengthening. You go to Dallas, you've got the Uptown area where a lot of supply has come on in that area, but you've got other markets in the greater Dallas area that haven't had new supply that are continuing to be strong. In Atlanta, you've got the Buckhead/Midtown area with a lot of supply, but then you have some other parts of the city like Alpharetta where it's difficult to add new supply. Those markets are doing really well. So it really is kind of going around the country and figuring out the supply-and-demand dynamics for that specific target area.
Bisnow: Another big concern we hear about is rising construction costs. What do you think about the impact of that? Does it concern you with challenges for new development, or could it also help slow down supply and that could benefit your existing assets?
Faith: That's right. As someone who's both a developer and an owner of assets, I'm kind of schizophrenic about how I feel about that. On the one hand, for our owned assets, some of those assets we've built that are in markets that have seen a lot of new supply, we're seeing that be a real challenge to the next round of new supply, which is really good for us. So that's certainly positive. On the other hand, as a developer, there are a lot of markets where it's getting much more difficult to pencil a new deal because costs have gone up.
Bisnow: I'm interested to hear your thoughts on the Opportunity Zone program. There has been a lot of buzz over the past few months over the tax benefits of this program and what it could do for communities. Is that something you're thinking about? Do you think this could be a powerful tool?
Faith: We're really interested in it. It is going to be a marginal benefit to certain sites and locations that maybe wouldn't have built as quickly as they are now with the additional benefits of being in an opportunity zone. So it's a terrific program. There's going to be a lot of capital interested in opportunities in that sector. I don't know that it's going to be such a huge incentive that it's going to make deals that shouldn't be built get built, which would be something you might worry about. But I do think deals that were maybe on the margin probably get built because of this, which I think is sort of the intention of this program that they rolled out.
But I think the ultimate governor on the program remains the construction lending community. When they underwrite a deal, they're not really seeing a benefit from the opportunity zone tax advantages. If someone's wanting to do a fundamentally bad deal, there still is a governor in the lending industry that's going to not do deals that don't pencil for them as a lender.
Bisnow: Speaking of construction lending, what is the overall mood of the lending industry right now? Are lenders being more hesitant or is there still plenty of financing available?
Faith: I think lending is still generally available right now. But I think one of the things that we've seen is the major lenders oftentimes have exposure to a lot of these markets that have a lot of development underway. They may be at a point where they're less interested in doing the next deal in Dallas because they've already got a big exposure to Dallas. We have seen that from some of the big money center banks that say they're overexposed to the Bay Area or Seattle or whatever it may be. Then you've seen it fall back to some of the more regional and local lenders to step in, and they don't have the capacity to do as much. So that's where we are in certain markets where it is getting more difficult to sell, until some of those deals stabilize and lenders get paid back and permanent financing is put in place and they open a little bit more of their capacity around the country.
Bisnow: Do you have any other macro-level issues that you're watching that could have a major impact on the multifamily industry in the coming years?
Faith: Well, the reason I love the apartment business is we have really incredible drivers to our sector. It's a much more demographically driven sector than an economic cycle-driven sector. Growth in the office market is dependent on economic growth. Demand for housing is population-driven. It's a more powerful underlying thing that doesn't stop when you have an economic downturn, people are still graduating from college and needing to live somewhere. The demographic push gives you a more solid underpinning that I'm not concerned about. At the same time, you see a global trend of urbanization. Long-term, I'm really bullish on the multifamily sector. There may be bumps in the road, and you're not immune to recessions, you just have to work through them.
Faith will speak alongside Sternlicht at the Bisnow Multifamily Annual Conference East, Nov. 28 at The Ritz-Carlton Tysons.