Greystar’s Wes Fuller sees big potential for U.S.-style multifamily product overseas.
Leslie Ryann McKellar Photography Greystar’s Wes Fuller sees big potential for U.S.-style multifamily product overseas.

When Greystar first bought into a 6,900-bed student housing portfolio in the U.K. in 2013, its investment dollars were bucking what was quickly becoming a blistering trend for U.S. multifamily operators.

At the time, global finance dollars in search of multifamily deals were beginning to pour into the United States, not leaving it. By 2015, those inflows would culminate in a $13.5 billion torrent of international investing dollars landing on multifamily’s domestic shores. The outflows, by comparison, were just $5.6 billion, according to JLL Research.

Despite that trend, Greystar, already a U.S. rental housing juggernaut at the time by any measure, was sending dollars in the other direction and buying up beds overseas, in addition to its continued growth in the U.S. In its first three years in the United Kingdom, the Charleston, S.C.–based company would leverage its initial investment, along with its American-made multifamily philosophy, to increase the NOI of its London student portfolio by 34% on a same-store basis, according to Wes Fuller, executive managing director of investments at Greystar.

“There were a lot of different factors that went into that [result], but we lifted NOI by using our operational expertise to drive higher revenues, and lower expenses, at the asset level,” Fuller explains.

While a jump of just a few points in NOI would be laudable in a new U.S. locale, the outsized gains had as much to do with the relative state of the U.K. rental housing industry as they did with what the company actually bought. “That’s the kind of opportunity you get in a less-mature industry, where there’s less information and fewer professional operations,” Fuller says.

The industry he’s referring to, of course, is the U.K.’s “built for rent” housing market—the Brits’ moniker for multifamily—which, from an institutional perspective, is still in its nascent stages, with just an estimated 6.5% of rental stock institutionally owned. With similar institutional underrepresentation in many markets globally, U.S. multifamily operators and investors are suddenly salivating over untapped markets overseas and in 2018 invaded foreign shores to the tune of $12.9 billion in capital flows, just a scant $1.6 billion less than international inflows into the U.S. during the same period, according to JLL Research.

Greystar broke ground on Puerta Bosques, a 45-story, 455-unit tower in Mexico City, in Q3 2018 as the first phase of a large mixed-use development that will include four residential towers, hotels, offices, and retail.
Courtesy Greystar Greystar broke ground on Puerta Bosques, a 45-story, 455-unit tower in Mexico City, in Q3 2018 as the first phase of a large mixed-use development that will include four residential towers, hotels, offices, and retail.

Fast-forward to 2019 and Greystar’s move looks almost savant-like in hindsight—of the company’s $31.9 billion in assets under management, $7.5 billion worth is abroad, with operations in Mexico, Chile, Spain, the Netherlands, Germany, France, Australia, and China, in addition to the U.K.

“We had a handful of strategic capital partners who were asking us to invest with them outside of the U.S.,” says Bob Faith, Greystar’s founder and CEO, describing the formation of the company’s international strategy in 2013. “This reminded me of the multifamily industry opportunity when I started Greystar in 1993, so we decided to build businesses in the world’s great cities to serve those capital partners’ desire to invest in rental residential outside of the U.S.”

But the big little company from the Palmetto State is not alone in pushing America’s brand of multifamily overseas.

Just witness Atlanta-based Cortland’s own entry into the U.K., with the 2017 acquisition of developer Orion Land and Leisure, the cornerstone of Cortland’s $5 billion push to establish a 10,000-unit portfolio in the kingdom by about 2022. The company sees opportunities in other for-rent housing markets with the same relative “immaturity” characteristics that contributed to Greystar’s NOI rocket in London.

“Just the idea of multifamily right now is an entirely new investment class throughout much of the global markets,” says Mike Altman, Cortland’s chief investment officer, who likes to point out that Dallas–Fort Worth, with a slightly smaller population than London, has 500,000 professionally managed apartments, whereas the latter city currently has only around 20,000. “In the U.K., they call it ‘built for rent.’ In Brazil, they don’t even have a name for it yet.”

Then there’s David Woodward, former CEO of Laramar, who now heads SVN | CompassRock Real Estate, one of the largest real estate advisory firms in the world. Woodward actually moved to London to help clients looking to expand there, as well as in places such as Madrid, Berlin, and Sydney, Australia.

“You see a lot of U.S. companies that are coming over to the U.K. and starting to do a project or two, looking around for opportunities,” Woodward said during an exclusive interview with multifamily executive at the 2018 MFE Conference in Las Vegas. “It’s a really interesting time to be there.”

Also of interest: In 2017, investment outflows by U.S. multifamily investors looking for opportunities globally were $1.2 billion higher than what came into the country from overseas, according to JLL Research. That means while inflows in most years outstrip what’s sent abroad—including, just barely, the numbers for 2018—international investing involving the States is increasingly becoming a two-way street.

Indeed, those trends, viewed through the 20/20 hindsight of multifamily’s meteoric rise as an institutional investment class in the U.S. over the past 30 years, have many U.S.-based apartment pros wondering aloud if they can replicate America’s multifamily miracle and simply do it all over again, just a little farther afield.

“It’s an edge-of-your-seat kind of thing,” says Colleen Pentland Lally, director of global capital markets at Los Angeles–based CBRE. “Overseas, everything’s still mom-and-pop. When I go to events, people love to look at charts of U.S. multifamily going from 8% institutionally owned in 1985 to 25% today. They’re just waiting for that to happen in other markets. There’s all this pent-up interest that wants to know where that tipping point is.”

Whether 2019 provides that tipping point is still anybody’s guess, and the far more likely scenario is that if and when it comes, it will do so in stages while building on itself. But as U.S. operators continue their forays into foreign lands, one thing is becoming clear: Nobody does multifamily better than America.

“The reality is, these foreign real estate firms are coming to the U.S. to talk to more-experienced investors who believe in institutionally owned for-rent housing, which we call multifamily,” says Altman. “They want to know how we do it.”

Cortland Cassiobury, a 23-story, 485-unit tower planned for Ascot Road in Watford, Hertfordshire, England, will rise about 15 miles from central London and is slated to open in 2021.
Courtesy Cortland Cortland Cassiobury, a 23-story, 485-unit tower planned for Ascot Road in Watford, Hertfordshire, England, will rise about 15 miles from central London and is slated to open in 2021.

What’s Driving This Trend?
Ask observers why U.S. operators are interested in investing overseas today and you hear a range of answers. Some point to falling cap rates and relatively high prices in the U.S., making emerging markets attractive by comparison.

“With pricing reaching new heights in the U.S., investors continue to look for new ground and opportunities,” says Josh Goldfarb, vice chair of the multifamily advisory group at Chicago-based real estate services firm Cushman & Wakefield. “With less herd mentality and perhaps more aberrations, international geographies could look appealing.”

Others see moves by the likes of Greystar, Cortland, and CompassRock to send capital overseas as isolated business decisions, where the spoils of years of outsized rent increases in the U.S. are finally being deployed in other markets. “The gains U.S. real estate firms have made over the past decade are being poured into implementing a global reach,” says Kurt M. Westfield, CEO of Tampa, Fla.–based WC Equity Group.

The uptick in outgoing investment flows also provides an ironic contrast to the boom-boom days of 2015, when U.S. multifamily operators were awash in cash from foreign sources. Now, with credit tightening in Europe and South America and capital controls implemented by the Chinese government limiting how large institutional players there can place money overseas, dollars from the U.S. may be easier to access by comparison.

“Investors who know those regions may not be able to obtain capital in their own markets,” says Larry Bond, chairman of Los Angeles–based developer Bond Cos. “Sometimes, it’s the case that foreign investors—in this case, U.S. investors—have easier access to capital, so there’s a role reversal. We’ve become the Chinese.”

Those on the front lines of the trend point to the fact that there are also finally just other multifamily options to invest in around the world. “You’re just seeing capital have other choices today that it didn’t have before,” says Fuller.

When I go to events, people love to look at charts of U.S. multifamily going from 8% institutionally owned in 1985 to 25% today. They’re just waiting for that to happen in other markets.

Colleen Pentland Lally, director of global capital markets, CBRE

Indeed, time and again, sources told MFE the rising outflows of U.S. funds into foreign apartment markets don’t signal a waning faith in the outlook for U.S. multifamily as much as a broadening of the apartment market on a global scale and a belief the U.S. model can work elsewhere.

“Even with U.S. investors going overseas, they’re still tremendously active and heavily invested here domestically,” says Maggie Coleman, managing director of capital markets at Chicago-based Jones Lang LaSalle (JLL). “There’s still a tremendously liquid market in U.S. multifamily, with increased investment in 2018, and another active year on tap for 2019. I wouldn’t interpret increased activity by U.S. investors going abroad as signaling any issues with the domestic market.”

In fact, the inflow of $14.5 billion into U.S. multifamily from overseas in 2018 even surpassed the previous high-water mark of $13.5 billion, seen in 2015.

Demographic Redux
Instead of an either/or scenario, the more compelling underlying explanations for why U.S. multifamily players are looking abroad hinge on the same seismic demographic and cultural shifts that have rippled through U.S. homeownership and rental trends over the past decade and are now taking hold outside the U.S., too.

“In many cities now, you’ve got a young population, and you’ve got markets where there’s an extraordinary cost-of-living environment, places like Sydney, Melbourne, Dublin, London, and Manchester,” says CBRE’s Pentland Lally. “In those places, you have young people who in prior generations would have graduated from college and bought a house but who are now blocked from homeownership. They’re coming out of well-established student housing communities, but they’ve got nowhere to go but these mom-and-pop–managed apartments. So there certainly seems to be a need in the market.”

CompassRock’s Woodward extends the metaphor even further. “You layer on top of that changing lifestyles where millennials are putting off household formation—the whole ‘generation rent’ and the idea of why own if you can rent,” says Woodward. “Then, you’ve got the empty-nesters coming back into city centers. So it sounds like I’m describing Atlanta or Dallas or Los Angeles. But I’m actually describing London, Sydney, and Berlin. All these markets internationally are going through very similar demographic shifts.”

Then there’s the fact that whereas the U.S. multifamily industry has raised the bar of the apartment living experience domestically, in many markets overseas, renting is still seen as a privilege. Options where residents compare the gyms and lobby cappuccino bars of three new buildings before signing a lease simply don’t exist in other markets to the extent they do in the States. From that perspective, an opportunity to up the for-rent housing game overseas, as happened in the U.S., seems rife as well.

“When you look at the quality of apartment buildings in the U.S. in every market compared to 20 years ago, it’s incredible,” says Eric Anton, associate broker at Marcus & Millichap in New York. “It used to be that you wanted to save up and buy a condo, because condo buildings had gyms and pools, and rental buildings had a vending machine. But now, the quality of apartments is just so different.”

As American apartments have become more luxe and service-oriented, the rents institutional owners have been able to command for them has risen as well, which is at the heart of U.S. multifamily’s success over the past several decades. Now, with much of the rest of the world’s apartments in the hands of individual operators, concepts such as customer service and over-the-top amenities are largely nonexistent, which, the thinking goes, should give U.S. operators a big leg up when they take their pay-me-to-pamper-you model abroad.

“The trend line overseas is just so consistent with the trend line that has happened in the U.S. over the last 30 years,” says Fuller. “It was an industry dominated by mom-and-pops. It was an industry that didn’t have a lot of institutional capital. There were very few professional operators, developers, or investors. And you fast-forward to today, and it’s the most desirable asset class within real estate in the U.S.

“The opportunity we see is that what happened in the U.S. over the last 25 years is what’s going to happen in the world’s great cities outside of the U.S. in the decades to come,” Fuller continues.

Another motivating factor may lie in the form of the new U.S. tax code implemented in 2018, which effectively stopped money made overseas from being taxed twice—once in the country where it was generated and a second time in the U.S.

“Now, if you use the right ownership structure, and you’re already paying taxes somewhere else, you’ll get a foreign tax credit back to you,” explains federal tax attorney Jerry August, in the Philadelphia office of law firm -Chamberlain Hrdlicka. “So, depending on how much tax there is in the foreign country where you’re operating, you could have an effective U.S. tax rate of zero.”

It used to be that you wanted to save up and buy a condo, because condos had gyms and pools and rental buildings had a vending machine. But now, the quality of apartments is just so different.

—Eric Anton, associate broker, Marcus & Millichap

Indeed, for Cortland’s Altman, paying attention to those kinds of technical aspects when investing overseas is critical and may be contributing to the trend. “The legal structuring and tax efficiency you set up is massive,” Altman says. “One reason you’ve seen a bit more increase in outbound U.S. investments is because you’re no longer double-taxed. You’re not paying taxes on both sides of that investment trade.”

Culture Shock
And yet, just because institutional multi-family as the world is coming to know it may have been born in the U.S., that doesn’t mean it can be processed, packaged, and transplanted to other markets like an iPhone. Indeed, there’s still a healthy skepticism within the industry over whether American-style multifamily can work abroad.

“While you’ve seen several groups test other markets, you’ve got to keep in mind the U.S. multifamily market is already well established,” says Mauricio Gruener, co-founder of Miami-based Momentum Real Estate Partners. “Those same characteristics don’t necessarily translate from one country to the next.”

It’s also sometimes a lot easier to make money flow overseas—reflecting the trend of outbound U.S. investment—than it is for a stranger in a strange land, even one with the chutzpah of an American multifamily developer, to will a building out of the ground on foreign soil.

“There’s a big distinction between cross-border capital flows and operators actually planting their flag and opening up shop in another country,” says Chris Tourtellotte, managing director of acquisitions and capital markets at LaTerra Development in Los Angeles. “I think anytime you go to a foreign market and open up shop, it’s going to be extremely challenging. Real estate is such a localized business. Boots on the ground are important. So, whether it’s a Chinese developer coming to the U.S. or people from the United States going to Central or South America, it’s a complicated, difficult move for any developer to go into a new market on their own.”

For that reason, the partnerships and acquisitions that firms like Cortland and Greystar have made in target markets overseas make sense. Indeed, for Pentland Lally, who studies the granular differences between international markets, every locale is almost an entirely new world unto itself.

“The factor of difficulty is that each of these places operates completely differently,” Pentland Lally says. “It takes a company that’s committed to putting somebody in that market, do the research, and then wait to understand how things are done.”

Not to mention the need to be able to speak the language of the new country you’re in. Indeed, sometimes, even when the language is the same, it’s still different.

“We’re in the U.K., so we almost speak the same language,” quips Cortland’s Altman. “But you also have to be very focused on the vocabulary to make sure you know exactly what people are talking about.” For instance, the term “planning” has a different connotation in the U.K. development industry than it does in the U.S. “So you’ve just got to be really careful going in.”

Made-in-America Multifamily for the World?
So, is U.S. multifamily going global? The answer is yes, at least to some degree.

“I think multifamily is certainly globalizing. It’s happening. I watch it every day in my travels and in my conversations with my colleagues and friends,” says Pentland Lally. “But I don’t know what the inflection point will be. I think it will be region by region, because everything will happen in a different way in each place.”

Still, with demographic, economic, and cultural trends lining up to repeat what has already played out in the United States, it’s hard not to see some form of multifamily becoming America’s next big export. But it will take time. “It took a long time for the U.S. multifamily industry to mature to the way it is today, and it didn’t just happen over one cycle,” Fuller says.

“I think, internationally, we’re at the beginning of a long-term trend. We’re building replicas of our U.S. business in these places around the world, because we see a long-term opportunity as this specific asset class matures and grows over time.”