Bridge Investment Bulks Up on Class B Apartments

Real Estate Fund Intelligence’s Samantha Rowan interviewed co-CEO of Bridge Investment Group’s Jonathan Slager earlier this month surrounding the multifamily market. Their interview and insights are provided below.

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Institutional investors globally continue to be bullish on the prospects of the multifamily market as a stable hedge against volatility in what’s become the longest-ever commercial real estate cycle.

There remains ample demand and limited supply across Europe for a rising cohort of Millennial and Baby Boomers that is driving up transaction activity and driving down yields, according to a recent report from Savills. Indeed, the brokerage firm tracked E27bn of apartment investments across Europe in 2018, a 19% increase over a five-year period. Yields averaged 3.4%.

It’s a similar story in the U.S., where the multifamily sector saw record investment sales volume of $172.6bn during 2018, a 12.1% year-over-year increase, according to data from Newmark Knight Frank. About $50.9bn of activity was completed during the fourth quarter, the second-highest quarterly total ever seen. The sector produced total returns of 6.1% in 2018.

“The factors that are driving the performance of the sector continue to be a function of supply and demand,” said Jon Bell, CEO of multifamily specialist Bell Partners. “The demographic and lifestyle trends continue to favor renting and have fueled demand on the supply side.”

Multifamily owners and operators are seeing demand for all kinds of housing, from Millennials to Baby Boomers. “There’s a national transition to renting,” Bell said. “The Millennial generation, which is the largest population cohort in history, has a higher propensity to rent. They’re waiting until later to get married and having fewer kids, both of which are factors that are influencing them to remain renters into their 30s and 40s.”

Bell’s observations fall in line with data from Savills, which projected that 23% of the population of the developed world will be comprised of 20 to 39-year-olds. There’s a similar barbell for individuals who will be at least 65 years old by that time, the report stated. And there are a number of European cities like Edinburgh, Amsterdam, Copenhagen and many cities in Spain and Germany with rapidly aging populations that need senior housing and housing for a younger generation that simply can’t afford to buy homes.

Fundmap tracked a total of $15.98bn of pension fund capital committed to commercial real estate managers in 174 mandates during the first quarter of 2019. Of that, REFI US was able to identify sub-asset class data for 71 completed searches. From those mandates (totaling $6.01bn), residential and industrial properties were most popular with 51 mandates. This included 11 mandates that specifically focused on both asset classes, amounting to $401.63m of investment.

Jonathan Slager, co-CEO of Bridge Investment Group, said the company sees a triple play of demand that comes from senior renters, Millennials and recent immigrants. “The U.S. continues to see a net level of immigration of at least $1m per year and this group is a heavy renter cohort,” he added.

Bell Partners focuses on 14 U.S. markets, looking for cities with diverse economies and solid supply-demand drivers. “We are in most of the larger primary and secondary markets, apart from Chicago and New York. New York is its own animal, but Chicago has historically been a laggard from a performance perspective,” Bell said.

Institutional investors like the sector because of current income, long-term stability and the ability to find a buyer when an investment fund expires. “When I entered the business, institutional investors had less exposure and apartments weren’t as accepted as a portion of an investment portfolio,” Bell said. “But over the past 20 years, U.S. and foreign institutional investors are better understanding the U.S. housing sector. Foreign investors were slower to understand how our rental housing market works but now you’re seeing more foreign capital flow into the U.S.”

Bridge Investment Group, which focuses on workforce housing, has tended to stick in the suburbs around major cities like Seattle, Los Angeles and San Francisco. It also considers deals in secondary markets such as Phoenix, Atlanta and Charlotte. “These cities are all very fast growing but all of the jobs aren’t going downtown,” Slager said.

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Source: Real Estate Fund Intelligence

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