While the U.S. multifamily market has become less appealing to many investors, a London-based asset management giant is looking to capitalize on the lack of activity. 

L&G Asset Management made its first investment in a new U.S. multifamily development in Concord, Massachusetts, in August, after investing in existing buildings in Denver and Chicago last year. The Concord project began construction last month, and the investor is now looking for more multifamily deals as the sector’s development has slowed due to elevated interest rates, rising construction costs and stagnant rents.

Tim Watson, U.S. head of investment and portfolio management at L&G, told Bisnow that the slowdown creates an opportunity for the firm to make long-term investments in supply-constrained markets.

"We expect to hold these assets for an incredibly long time," Watson said. “Where we're looking is where fundamentals and multifamily can remain strong for a long period of time, and where demand is going to essentially outweigh the amount of supply that can come on.”

L&G has $1.6T in assets under management globally, including $288B in the U.S. It manages pension plans for retirees, so holding assets for the long term can generate steady positive returns for those pension liabilities. 

Watson said the Concord project — a 201-unit building replacing part of an office park — was the perfect opportunity to fund a new development, as it's in a metropolitan area where housing construction has lagged while demand has remained steady. 

He said the lack of new construction in the market presents an opening to fund new development with less competition.

"I certainly think it is absolutely an opportunity," he said. "We will deliver Concord into a market with not just no supply in Concord but very little supply, probably in the U.S. and certainly in the Boston area."

Greater Boston has long been known as a high-barrier-to-entry market with strict municipal zoning and a lack of affordable developable land to make projects pencil. The firm’s partnership with Boston-based Taurus Investment Holdings and EcoSmart Solution helped it break into the market, as they had already gone through a lengthy entitlement and permitting process.

"It just paints a broad picture of what we want to do in the U.S. and building partnerships and being in these communities," Watson said.

It also helped that the project was proposed under the state's 40B affordable housing law, which allows a multifamily developer to circumvent some permitting restrictions as long as they set aside 25% of the units as income-restricted.

Going forward, Watson said he expects L&G will fund more acquisitions of existing multifamily assets than new developments, given the hurdles to starting construction. 

With the rising cost of debt, construction costs and regulatory burdens, Watson said his firm is being selective with new ground-up development projects. It is looking for "very unique submarkets, very unique builds, very unique partners that we can do this with."

Landlords in many markets have been working through a glut of supply, especially in the Sun Belt region. And with higher-for-longer interest rates and construction costs that won't let up, multifamily development has been slowing across the country.

"There's a reason there's things not getting built," Watson said. "There's all sorts of things that go in that make it relatively difficult to make these deals pencil, and so those are things that are relatively hard to overcome."

Though L&G has had an office in Chicago since 2006, the firm has been pushing to expand its U.S. real estate presence over the last four years to set itself up for these types of investments.

In May 2022, L&G launched a joint venture with U.S. developer Ancora to acquire and develop $4B worth of life sciences real estate across the U.S.

By October 2022, the fund had secured its first life sciences assets: a 128K SF building in Atlanta and an 80K SF project in Providence, Rhode Island. But that once-booming sector started to plummet the following year, and a wave of speculative construction led vacancy to surpass 30% in some markets. 

"The life sciences market has had a very heavy period of supply, and demand has not met that supply," Watson said. "We do manage those current assets, but we wouldn't expect that we'll do anything new in the life science space."

The firm launched an expansion into the U.S. residential market in 2023. Before it began funding ground-up development investment, it made investments into existing multifamily buildings. 

Last year, the firm acquired The Alder in the Denver metro area for $97M and Arkadia West Loop in Chicago for an undisclosed price. 

Watson said the firm is looking for other opportunities in supply-constrained markets, both for ground-up and existing asset investment. Other attractive markets include the New York and California metropolitan areas, as well as regions that have welcomed a surge of development, like Nashville and Austin. 

"I would say we're not heavy in the Sun Belt, but certainly there are markets that we find incredibly interesting given the amount of growth that they have," Watson said. 

“If you look at an Austin or a Nashville, they've had a heavy amount of supply come on, but they've also absorbed a very heavy amount of units, and they still continue to have a really high amount of growth. Those, for the long term, we still see as highly durable, long-lasting markets.”

The firm said it also plans to expand into the industrial market — specifically, the shallow bay and logistics sectors.

"Ultimately, we're tasked with building out a large real estate platform that does more than just multifamily, and over time probably more than just shallow bay and logistics, but I do think that's probably next," Watson said.