Unprecedented Climate Drives TCR’s Multifamily Investment Strategy

Trammell Crow Residential CEO Ken Valach said he has “never seen anything like” the current multifamily environment of short supply, increased absorption and rent growth particularly in the markets with diversified economies and job and population growth.

Seizing the opportunity through its national real estate investment and development firm Crow Holdings, it has closed its third development pool of its long-term, multifamily build-to-core fund, Crow Holdings Multifamily Build-to-Hold Fund.

With this new $332 million in equity commitments and approximately $680 million in aggregate equity commitments to date for the fund, including anticipated leverage, the company has  more than $1.1 billion of purchasing power. 

The fund, which began in 2016, “is designed to build a geographically diversified portfolio of core, stabilized, Class A multifamily assets at wholesale pricing and then hold the assets for the long-term as an intended source of steady cash flow and value creation,” according to a company release.

Bob McClain, CEO of Crow Holdings Capital, said in a prepared statement that this fund is another example of executing on a strategy that focuses on secular trends of demographics and domestic migration. 

This is Crow Holdings’ third closing announcement of an investment vehicle in less than two months. All together, its funds total nearly $1.7 billion in equity commitments.

Investors Focused on Long-Term Cash Flow, Equity Returns

The investment “speaks volumes to how well multifamily performs during periods of uncertainty,” Karlin Conklin, principal and co-president at Investors Management Group, tells GlobeSt.com. “Those of us who have been through previous market downturns know that quality multifamily assets, under a strong operator, can withstand periods of compressed returns. Increasing supply to meet the demand for amenity-rich core assets is critical as we brace for a period of higher inflation.”

The investment strategy is also well suited for the current environment, says Eli Randel, Chief Strategy Officer at CREXi, who tells GlobeSt.com that home builders and developers alike are finding attractive strategies in building product to lease and hold vs. sell soon after delivery.

“The trend emerged in single-family with build-to-rent programs forming among several SFR players,” Randel said. “It looks as if the strategy has migrated into multifamily development as developers are capitalizing on tight market conditions and choosing to stay in the deals for a longer time-horizon.”

Build-to-core has been a “wonderful” strategy for those investors focused on long-term cash flow and equity returns, Thomas Foley, CEO at Archer.re, a real estate technology firm, tells GlobeSt.com.

“Crow Holdings understands this better than anyone with their deep DNA in development and institutional investor view of the industry,” Foley said. “High-quality housing is desperately needed—especially in all these newly high growth markets bursting with new residents. 

“There have been a lot of quick flip investors benefiting from the decreasing interest-rate train—but Crow understands that in order to hit the returns they (and their investors) require—they need to lean into their expertise, which is development, and remove transaction fees by holding quality properties longer. 

‘High Conviction’ in Multifamily Today

Build-to-hold is certainly not a new approach, Cadre’s investment specialist David Vincent tells GlobeSt, “but it really does demonstrate high conviction in the multifamily sector as well as in the local markets.”

With such strong long-term tailwinds for multifamily in many markets, Vincent said you can see why this makes sense. “If you believe you can deliver a new project in a reasonable time frame and at a reasonable cost, you may be able to capture higher cap rates than you would from existing assets at current prices.”

For example, he said, if a developer thinks it can deliver something north of a 5% cap in a market that is currently trading closer to 3% caps, then that may be enough to compensate for the development risk.

“To execute on this strategy, it is essential to have a strong development and asset management team—two skill sets that are very different from each other. Development deals often have a shorter time horizon (about 3 to 5 years) and a higher expected return since so much value is created in the early years. 

“So, investors typically expect higher returns on development deals to compensate them for the risks of new construction. For a build to hold strategy, you are taking on all of the development risk—and while you do still get the higher development returns in the early years—the life-to-date return on that asset starts to go down as the asset stabilizes. 

“For this type of deal to work, you need to align the investor expectations and assets with the time horizon and risk/return profile of the deals you plan on doing. You also want to target markets where you can achieve attractive rents and see an opportunity for sustained growth.”