Big Funds Are Buying Up Multifamily Operators, Not Just Assets
As more real estate funds increase multifamily allocations, they are buying operating companies as part of the business model.
Institutional investors are making strategic changes in the aftermath of the pandemic. In addition to holding properties for longer, institutions are also buying an interest in operating and property management companies as part of their new business model.
“When big funds are looking to make a commitment to enter the multifamily space and they haven’t been there before, they don’t just look at assets,” Jahn Brodwin, senior managing director in the real estate practice at FTI Consulting, tells GlobeSt.com. “If they are interested in a portfolio from an operator, they are now buying the assets and an interest in the company, and then retaining the operator as management.”
By purchasing a stake in the operating company, these funds gain control of the operations at the property and reduced operating costs as well. “When you own a piece of the operating platform, you are getting much better control of the asset and, if you buy into the platform right, hopefully, you are enhancing your returns,” says Brodwin.
However, Brodwin notes that buying a stake in the operating company is not analogous to creating a vertically integrated investment platform. “There is a benefit to buying into a company that is already structured,” he says. “These funds don’t want to hire a COO, an accounting department and so on all for the purpose of acquiring assets.”
The strategy is also a benefit to the operating company. Once the investor buys a piece of the operating company, they can go out together and buy more assets with the fund’s capital and the operator’s market knowledge. “That will make the operating platform more efficient and more profitable, and both companies will share in that profit, says Brodwin.”
This was a strategy than many funds honed following the Great Financial Crisis. In the aftermath of the 2008 recession, investors saw operators continue to survive. “A lot of investors in the post-2008 era realized that they lost a significant amount of equity because they were only invested in the building,” says Brodwin. “However, the operators were still getting property manager fees, asset management fees and acquisition and disposition fees.” Now, institutions are hedging against the downside by partnering with the operators.