BLUEPRINT: Leaps of Faith

Nothing gets Bob Faith going quite like new ideas. So the normally upbeat chairman and chief executive of Greystar Real Estate Partners gets even more animated when he gets on the topic of Airbnb and how he is applying the concept of the online hotel marketplace to his own multifamily business.

“You’re going to see technology really disrupt that space in the way that Airbnb is on the leisure travel side,” he says, speaking with PERE at Greystar’s headquarters in Charleston, South Carolina in July. Last November, Greystar invested in a San Francisco-based startup firm called Urbandoor, an online marketplace intended to directly connect users of corporate housing with owners of real estate.

Corporate housing, like a number of Greystar’s investment platforms, is considered a niche or alternative strategy within private equity real estate. “If you go outside the US, serviced apartments are a very standard asset class in a lot of other markets,” he says. “But serviced apartments are unusual in the US. It’s totally fragmented.”

While alternative strategies typically are associated with smaller real estate firms, Greystar defies that stereotype as the largest apartment manager in the US, operating approximately 414,000 units in 160 markets globally as of year-end 2015 – and more than double the size of second-largest manager, Lincoln Property Company, with 165,000 units, according to the National Multifamily Housing Council (NMHC). It also ranked 32nd among the 50 largest US apartment owners, with some 38,000 units, and fifth among the 25 largest apartment developers in the country, according to NMHC.

Although the majority of Greystar’s assets are in conventional market-rate multifamily, the company also has five niche strategies within the sector. Aside from Greystar Corporate Housing, the alternative platforms include Overture, its US active adult housing platform for residents aged 55 and over; Greystar Student Living, its US college apartment business; Prodigy Living, its urban student accommodation business in the UK; and Chapter Living, its London-focused luxury student housing strategy.

These strategies are far from novel for Greystar, however. In fact, the firm has been in investing in alternatives since its founding in 1993, when it formed an assisted living company called EdenCare, as well as an extended stay hotel company called Homegate Hospitality in partnership with Trammel Crow Residential. EdenCare was sold to Sunrise Assisted Living (now known as Sunrise Senior Living) in 2003, while Homegate was taken public in 1996 before being sold a year later to Fairfield, New Jersey-based Prime Hospitality.

Greystar also has been active in student housing since 2009, when it acquired JPI Management Services, the management services arm of Irving, TX based JPI, which had its own student housing division.

“Our expertise in conventional multifamily easily segways into things like student housing or things like active adult,” says Faith. For example, student housing involves a similar marketing process to that of conventional multifamily but has a condensed leasing period that mirrors the college school year. Meanwhile, the leasing process for active adult housing can be considerably slower than traditional multifamily housing, since the active-adult population is often much more selective as renters. 

“But while the marketing piece of it is different, the taking care of the properties, the investment strategies, the things that you do to create value, the development of it, whatever it may be, it’s the same,” says Faith.

The original niche

When Faith founded Greystar in 1993, the multifamily sector was still considered an alternative real estate strategy. His first multifamily investments, however, were as the co-founder of Starwood Capital Group, which he formed with his former Harvard Business School classmate, Barry Sternlicht, in 1990. Starwood spent its early years primarily buying distressed assets that previously had been owned by failed savings and loan associations and were subsequently taken over by the Resolution Trust Corporation.

The majority of the savings and loan assets were in multifamily, which left an impression on Faith. “If you have an empty office building in the midst of a recession, it is going to stay empty until the economy comes back and companies start growing again,” he says. “Whereas the great thing about apartments is you can always fill them up, because it’s more of a demographically-driven demand, rather than economic cycle driven demand.”

He adds: “So even in the midst of all that distress, we were able to buy cash flow, and keep assets flowing cash. So that really hooked me on the apartment business.” At the time, however, apartments were not considered an institutional property type like office, retail or warehouses, but rather a mom-and-pop, fragmented and unprofessional industry.

Three years after launching Starwood, Faith and Sternlicht planned to take the firm’s multifamily platform public as a real estate investment trust. With 11,000 units, the business would have been one of the largest REITs at the time.
However, on a ski trip with a group of former Harvard Business School classmates, the two men were persuaded by their friend Stephen Quazzo to merge their portfolio with Sam Zell’s Equity Residential, where Quazzo was working at the time and which was preparing for its own initial public offering.

A Greystar is born

After the Equity Residential IPO in 1993, Faith and Sternlicht went their separate ways. “I think there was just a natural evolution of the partnership,” Faith recalls. “We’re still friends, but Barry and I are both A types, and it made a lot of sense for both of us to have our own show, if you will.”

With both men living in Chicago at the time of the split, Sternlicht decided to return to the New York metropolitan area and focus Starwood’s business on land and hotel investments. Faith’s next stop was in Houston, where he bought Greystone, a property management company with 9,000 units under management. He named his new firm Greystar, an amalgam of Greystone and Starwood, with the vision of building a full-service multifamily real estate company offering three business lines: property management, development and investment management.

All three businesses got a significant lift as institutional investment in apartments began to take off. “In the 1990s, very few institutions owned apartments,” says Faith. “Institutional ownership of apartments was just a wave through the 90s. We really benefited from that wave of institutions owning apartments, and they wanted to have a professional operator.”

That demand for property management in turn spurred demand for Greystar’s investment management and development platforms. “Our growth really started building as our customers started growing their portfolios and wanting to have a one stop-shop for their management services,” he says.

Greystar’s investment management business in particular made a huge leap after the firm – which by now had relocated to Charleston – shifted from managing primarily high net worth capital to investing capital for large institutional investors. Greystar Equity Partners III, whose anchor investor was the Oregon Public Employees Retirement Fund, was the firm’s first institutional real estate fund, closing on $300 million in 2000.

“That really changed our business in a lot of ways,” Faith recalls. “We really had to invest in our systems and our people and our processes to really raise our game on the investment management side to be an institutional investment manager.”

He considers the period from 2000 to 2008 to be years of significant growth for the firm, as it raised and invested ever-larger amounts of institutional capital through closed-end funds. In 2007, New York-based investment bank Goldman Sachs, which was a large property management client of Greystar, acquired a 20 percent stake in the firm. “That was a wonderful infusion of capital that really allowed us to continue to grow post-global financial crisis,” says Faith. Greystar bought back Goldman’s stake last year.

When the global financial crisis hit in 2008, Faith saw it as a “tremendous opportunity” to expand his company: “We had no distress, we had no debt as a company, so we were poised to really be able to grow the business, and it’s oftentimes in periods of distress that one can grow the business most quickly.”

Indeed, in January 2009, Greystar made its first large company acquisition, buying JPI, which gave the firm a presence in every major market across the country, expanding its portfolio to more than 140,000 units under management. Greystar went on to acquire the second-largest US operator of apartments, Riverstone Residential Group, from London-based CAS Capital Limited in June 2014, which increased its portfolio to more than 385,000 units under management.

Investor approval

Meanwhile, the firm has continued to see strong organic growth. Greystar is set to close this month on its largest-ever real estate fund with the latest offering in its US flagship value-add series, Greystar Equity Partners IX, for which it is targeting $1 billion in capital commitments.

Whereas Fund VIII, which attracted a total of $800 million in 2014, primarily had US, European and Canadian investors, the latest fund is expected to have more Asian limited partners, according to Faith. Indeed, at the time of his meeting with PERE, Faith was preparing to take a two-and-a-half-week trip to Asia to meet with a variety of institutional investors in the region.

For Faith, a key selling point for investors has been the access to data that results from Greystar’s size and scale: “That’s what I think our real calling card is, the amount of information that we control and are able to mine across this huge platform.”

The fact that Greystar is the largest multifamily manager in the US “gives them access to intelligence and information we think like no other,” agrees Ezio Sicurella, senior vice president in charge of the multiresidential program at Ivanhoé Cambridge, the real estate subsidiary of Canadian pension plan the Caisse de dépôt et placement du Québec.

“What we’ve found is whatever Greystar does, whether it’s a new asset class or new market, it’s really based on macroeconomic and microeconomic research, with an investment in people and resources. It really is a well-studied analysis that’s done.”

Ivanhoé first began investing with Greystar in 2013, when it joined a partnership that also included Goldman’s Real Estate Principal Investment Area in a portfolio purchase of 27 US multiresidential properties from Equity Residential. Today, the pension plan has invested approximately $1.5 billion with Greystar and is planning to further expand the relationship.

“I think it’s probably the partnership that will be growing the most in the next few years, given their presence everywhere in the US and elsewhere on the globe,” says chief investment officer Sylvain Fortier.

Tripp Moye, director of acquisitions at Chartwell Holdings, a Charleston-based multifamily real estate firm, observes that Faith’s standout traits are his ability to set a vision, knack for good timing and skill at connecting with investors.
“When Bob gets in front of investors, he’s unbelievable,” says Moye, who worked at Greystar as an associate from 2000 to 2006. “He has an impressive way of selling his vision to investors.”

Fortier also notes Faith’s personal touch in dealing with investors such as Ivanhoé. “I was telling him about my nervousness about having to speak [at my daughter’s wedding], and he was telling me about how he was driving one of his daughters to college, and how that was a big moment for him,” he recalls, referring to a conversation the two had in August. “That was before he asked me if we would be interested in a multibillion dollar multifamily portfolio in a new country.”

Faith’s grace under pressure also has enabled him to foster relationships with investors. “He’s a very calm guy, who doesn’t seem too stressed out by these large deals or these large decisions that he has to make all the time,” says Fortier. “So it makes for very pleasant discussions in a very relaxed and non-pressing kind of environment.”
Strong performance also has kept investors loyal. Greystar declined to discuss returns, but according to one long-serving advisor, the firm has managed leveraged returns in the mid-20s and 30s for some of its major development investments. “The last fund produced a high net teen return from what were supposed to be value-add investments, not opportunistic,” he said.

Exporting US apartments

While it has become a dominant force in the US multifamily sector, Greystar also has been making significant inroads abroad. “The US is far more advanced in having purpose-built rentals,” says Faith. He notes that the only two other markets with purpose-built rentals are Germany and Japan, while all other markets are essentially condo markets where the owners buy units and then rent them out to tenants. “Exporting (our) expertise to other markets is how we’re going to grow globally.”

In setting up its UK operations, Greystar relocated senior executives from the US – most notably Wes Fuller, the head of the firm’s investment management business – to London, while also hiring local British professionals. The locally-hired staff in London also have spent time at the company’s headquarters in Charleston.

Greystar made its first international investment in October 2013, with the acquisition of a 21-asset student housing portfolio in the UK, in partnership with Goldman. Greystar currently manages more than 30,000 multifamily and student housing units in the UK and Netherlands.

Greystar also has established a footprint in Latin America, thanks in part to its relationship with PGIM, formerly known as Prudential Real Estate Investors. A longtime development partner and property management client, PGIM hired Greystar in 2013 to operate its multifamily assets in Mexico City. Its on-the-ground presence in Mexico subsequently led to the formation of a €250 million separate account with a sovereign wealth fund to develop additional assets in the city.

Faith expects Greystar’s growth to continue at a robust pace. The firm’s headcount, for example, has increased by an average of 10 percent, or 1,000 people, per year in recent years. He anticipates that Greystar will also continue to expand globally, as the firm works on an initiative in Chile that could be launched in the coming year, and looks at extending its UK multifamily platform to other countries in Europe.

“The chapters to his book are not all written,” says Sicurella. “I get the sense that every time I speak to him, he has new ideas and I think we may see him move towards other markets in Asia and more nascent markets, where you don’t have purpose built rental, institutionally managed product.”

Not everyone has viewed Greystar’s phenomenal growth as a positive. “With any organization that’s large and growing, there is the potential risk of becoming a bureaucratic machine,” says one industry observer. “You lose your edge, because you have a large infrastructure to now support. You also lose the nimble nature that you had as a smaller firm.”

He adds: “Size and scale get you market share and buying power. But catering to hundreds of clients, that’s a lot of people to please. Certain investors would rather be one of four, rather than one of 200.”

And one former employee noted the change in work culture as the firm continues its expansion: “A lot of people at Greystar are going 150 miles an hour and never slow down.”

Entrepreneurial spirit

Others, however, argue that Greystar has not lost its entrepreneurial roots. “What’s great about the model that Bob created is he gives you responsibility. If you have a great idea, you go do it,” says Eddy O’Brien, who ran Greystar’s investment strategy group for five years before leaving earlier this year to form Blaze Partners with Chris Riley, a 14-year Greystar veteran who was portfolio manager for Greystar’s flagship value-add funds. Indeed, O’Brien helped to conceive and spearhead Greystar’s active adult strategy three years ago.

He adds that the firm is “a super-flat organization,” where a first-year analyst with a good idea doesn’t need to go up the chain of command, but can go directly to the executive committee with his or her pitch.

Faith has built a strong team at Greystar, notes Moye. “He has a great ability to attract very, very talented people,” he says.

Although he generally has a hands-off approach with his senior management team, Faith is known for pushing them to do better. “He doesn’t hesitate to challenge them,” says Moye. “He wants his business leaders to think big.”

O’Brien also notes that it has become a natural progression for more entrepreneurial-minded employees to leave the company and launch their own businesses. “If you see people leaving, they’re usually not leaving to join a competitor,” he says. “They’re leaving to start their own companies.”

Employees, however, are not the only source for ideas for new potential strategies at Greystar. “Ideas can come from lots of different places,” says Faith. “We’ve had investors who’ve approached us with an idea or niche and said, ‘we’ve done this very successful strategy over here in this market, but we did it with this partner that can only do it in that market. We would love to take that idea and roll it out across your whole platform.’”

Faith also has taken a page from the playbook of rival firms. “The great thing about this industry is that you can drive by your competitors’ properties. There are no secrets in the industry. We see great ideas and we think, that’s an idea that we can also take.”

Faith says there will always be “offshoot ideas” to identify and possibly invest in. “I love to say, the boring old apartment business has been a pretty good place to be for a long time,” he says.

Greystar Real Estate Partners
Headquarters: Charleston, South Carolina
Established: 1993
Key executives: Bob Faith, Bill Maddux, Derek Ramsey, Andrew Livingstone, Wes Fuller, Scott Wise
Number of employees: 11,876*
Number of investment staff: 75
Total assets under management: $14.5 billion*
Total equity raised: $9.4 billion**
*As of Q2 2016
**Since inception