A new residential real estate fundraising record was set last year, as managers raised some $33.55 billion. That eclipsed the $31.51 billion raised in 2021 and smashed past the totals for 2017-20, with the average in those four years coming in at just over $19 billion, peaking in 2019 at $22.32 billion.
Although the start to 2023 has been quieter – PERE’s preliminary figures put Q1 2023 fundraising at $2.16 billion, having surpassed $8 billion in Q1 2022 – the rally in residential, particularly as other sectors have struggled, has been noteworthy.
While it would not be wise to draw too many conclusions from a limited sample size, the amount of capital raised for sector-specific residential funds as a proportion of all real estate funds appears to have slipped slightly, from 46 percent in 2022 to 38 percent for Q1 2023, although that is in line with 2020.
Among the funds to have closed in the first three months of this year are HGI Multifamily Credit Fund, a $1.8 billion debt fund from Virginia-based manager Harbor Group, and Hillpointe Workforce Housing Partnership IV, a $500 million offering from Hillpointe, the market rate workforce housing specialist which is based in the US Southeast.
A further raft of large funds is in the works, led by Berkshire Residential Investments’ Berkshire Bridge Loan Investors-MF1 III fund, which is targeting $3.5 billion. All of the 10 largest funds in market are targeting $1 billion or more.
Here are three key trends to look out for as we go through the rest of the year.
1 Living in the office
Office real estate used to be a very safe bet. The covid-19 pandemic has not killed the office, but it has led to a widespread reappraisal of it, not least as firms such as Russell Investments forecast zero rental growth in offices over the next five years versus up to 15 percent in the residential market.
The option of converting underused office space to residential appeals to many managers, although they are generally not yet rushing to act. Richard Sykes, development director at London-based Patron Capital, is far from a lone voice when he says: “We have looked at a lot of schemes, but frankly, none have convinced us.”
Partly, this reticence can be explained by uncertainty over ESG-related costs. Sebastiano Ferrante, deputy head of Europe at PGIM Real Estate, notes that “properties considered for conversion are often non-ESG compliant,” so would require significant investment. This is difficult at a time when cost inflation is making it harder than before to arrange funding.
Nonetheless, there are not significant conversion projects taking place. There are plans to raise more than $1.5 billion for commercial landlord Silverstein Properties to change unwanted office space into residential housing, while major projects are in the works from New York to Salt Lake City.
2 Getting to work(force)
The Hillpointe workforce fund from Q1 could well be a sign of things to come. It follows Salt Lake City-based Bridge Investment Group raising $1.74 billion for a workforce housing fund last year, the largest ever raised in the space.
Rachel Diller, senior managing director and co-CIO for workforce and affordable housing at the firm, is clear that investor demand will grow. She adds: “We have been investing in workforce housing for many years and are optimistic that even more capital will come.”
The other part of her brief, affordable housing, is also set to grow. It is, for example, the focus of the third-largest fund in market, HDFC Capital’s HCARE-3, which is targeting $2.2 billion.
3 Embracing technology
Residential real estate is becoming increasingly operationally intensive. As managers look to adapt to the changing demands placed upon them, they are turning to technology.
The potential applications of technology are many and varied. Artificial intelligence can help with everything from marketing – allowing prospective residents to get in touch 24/7 – to cutting costs and hitting ESG targets, including by improving energy efficiency, which is becoming more important as regulators look to improve the energy performance of properties.
A number of technologies are being developed and implemented. A bright digital future awaits.
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