Crow Holdings, a real estate manager with $24 billion of assets under management, has launched a new joint venture focused on the development of what it is deeming attainable housing. The firm defines attainable housing as residences that serve renters who earn 80 percent to 120 percent of the area median income (AMI) of the US region where they live.
The venture has raised $400 million from two undisclosed investors: a global pension fund and a global sovereign wealth fund, Michael Levy, CEO of Crow Holdings, told PERE. The firm is also making a GP commitment of $20 million to the partnership. The capital will help the firm to scale Allora, the development brand of Trammell Crow Residential, one of Crow Holdings’ operating companies, and build an additional 8,000-plus units on top of the 2,400 it already has in its pipeline.
The partnership will primarily be focused on the Southeastern and Southwestern US, including Charlotte, North Carolina; Atlanta; and key markets in Texas and Florida. The firm may also look as far north as the Washington, DC area on the east coast, and Seattle and Portland on the West Coast should the right deals arise.
The structure was chosen to allow Crow Holdings to hold onto the assets for longer. While a fund structure was not inherently better or worse than the programmatic JV the firm opted for, the world’s largest investors are seeking to have more direct relationships, Levy said.
Investing in non-fund structures can give investors more control over assets and less fees, while allowing managers more flexibility in their holding of the assets. Around three-quarters of the assets in the venture have an initial hold time of 10 years. The remainder will be held for three to four years. The investors can also choose to extend the hold of the assets by two additional 10-year periods.
Crow Holdings has previously dabbled in what the rest of the market might dub ‘workforce housing.’ Steve Bancroft, senior managing director at Trammell Crow Residential, said the manager built seven of these properties in the mid-2000s.
“This isn’t a brand-new idea for us. The main reason we stopped is that capital drove us away from it. The capital wasn’t ready for the story,” Bancroft said.
The market has changed since then, with investors now viewing real estate as both an appreciation and long-income play. A development strategy focused on a property type with sticky tenants caters to this narrative.
Both Bancroft and Levy said there is no shortage of investors looking to participate. While Crow Holdings will be primary focused on its new venture partners with its attainable housing strategy, they may choose not to pursue certain deals. If that is the case, Levy said he is “highly confident” other investors would want to participate.
The social and financial intertwine
Indeed, attainable housing has gained traction with investors given the greater industry focus on ESG factors in investments. Crow Holdings’ strategy will focus predominantly on the ‘S’, providing housing to essential worker tenants like firefighters, police officers and teachers. However, the firm is also looking at incorporating sustainability features, such as solar panels and electric car charging stations, at most of the properties being developed.
While institutional development of multifamily has typically focused on the Class-A luxury space because of the favorable economics, Crow Holdings has devised ways to reduce project costs and allow the strategy to make financial sense. For this product, the firm is only focusing on amenities that make sense for its target tenants, like bike storage, while removing or reducing the physical footprint of extraneous ones like balconies and gyms that are more typical of luxury buildings.
“Balconies are great when staring at mountains but they’re not great for storing bikes,” Bancroft said. “The reduced number of balconies on buildings can be given back to the conditioned living space.”
Other changes include altering corridor designs to increase the leasable space in properties from 88 percent to 92 percent. All told, the capex considerations will typically result in cost savings of around $5 million to $6 million a project, which in turn saves between $75 and $100 a month for the renters, Bancroft said.
While reducing rents may seem counterintuitive, Crow Holdings’ current projects have reached almost full occupancy around 30 percent faster than anticipated, Bancroft added. Traditionally, workforce housing maintains stickier tenants given the barriers to social mobility, so occupancy and thus yields remain steady.
The strategy, however, also faces certain challenges. For one thing, the cost of capital is cheap now but with interest rates slated to rise this year, that could create a more difficult environment for keeping rents low.
But the most difficult issue to overcome involves the entitlement risk of development projects. Crow Holdings’ cost-saving measures can run counter to what local governments want, according to Bancroft. For example, some cities are asking the firm to provide more balconies or car parking spaces, which are antithetical to lowering costs and therefore rents, he said.
“So much is in the hands of city planning across America,” Levy said. “They can either help people like us or make it more challenging.”
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