Finding Profitable Markets For Multifamily Investing, With GTIS Partners

In this webinar, Peter Ciganik and Tom Shapiro present the GTIS US Residential Fund III.

Webinar Highlights

  • An overview of the GTIS fund, a $500 million raise focusing on residential projects in high growth markets.
  • The focus on “bite size deals” that are not as competitive as other real estate projects.
  • The history of GTIS, which was founded in 2005 and now has $4.3 billion in assets under management.
  • The focus of the fund from a geographic perspective to date.
  • An overview of the fund strategy, focusing on the spread between development yields and spot stabilized cap rates.
  • How long term demographic factors are combining with short term pandemic-related factors to drive up the need for multifamily housing.
  • The impact of an uneven surge in rent rates across the country.
  • Review of the fund pipeline, including equity commitments and target returns.
  • Live Q&A with webinar attendees.

GTIS US Residential Fund III

A $500M diversified fund targeting residential and mixed use development in top US regional markets. The fund will focus on the residential sector supported by long-term demand tailwinds and prolonged undersupply, targeting 20% gross IRR and 15% net IRR fund return to investors.

Learn More About GTIS Partners

Webinar Transcript

Jimmy: We’ve got Peter Ciganik and Tom Shapiro, these two gentlemen joining us today from GTIS partners.

Tom: Thanks.

Jimmy: Tom, good to see you there. How you doing?

Tom: Good. Good to see you. Thanks for having me. Thanks so much for everyone for joining.

Jimmy: Absolutely. And Peter, how are you doing?

Peter: I’m great, Jimmy. How are you?

Jimmy: Fantastic. Well, I can see and hear both of you just fine. So without further ado, I’ll turn it over to you.

Tom: Thanks so much. Appreciate everyone joining us today. We’re gonna talk about our latest fund offering, which is our third residential fund. Since the firm was founded in 2005, we’ve been very active in the residential market, but particularly since the GFC, we’ve been really focused primarily on residential. We just find there to be tremendous opportunity. Peter will go through the macro story, but it’s extremely compelling. And we found a lot of great investment opportunities. We’re gonna raise a 500-million diversified fund targeting residential development in growing markets where we see above-average job and income growth. We really focus a lot on risk diversification.

So, we’re looking at what we call bite-sized deals, $20 to $50 million of peak equity. These are type of transactions the mega-funds don’t really focus on. So we find it to be a less competitive part of the market. It’s really a continuation of our longstanding residential strategy. We’ve done 125 residential investments totaling over $9.4 billion in total cost. We have a deep residential and also industrial investing experience. We’ll talk a little about industrial, too, because we’ve been layering in industrial over the last couple of years as well. We have in-house development skills, but we also, oftentimes, partner with local sharpshooters in different markets. The target of this fund is a 20% gross IRR and a 15% net IRR.

So, I’ll talk a little bit about the firm itself. I actually was a longstanding partner at Tishman Speyer Properties, was there for 17 years. I started in 1988 and finished in 2005 when I formed GTIS. I’m joined by four senior partners. We collected about 130 years of real estate investment experience. Since we started the firm in 2005, we now have 84 employees across seven different offices, and we manage about $4.3 billion of gross AUM.

We’ve invested across all our major property types with a focus really on residential, as I was mentioning, since the financial crisis. If you look at the different areas we’ve been focusing on really after the GFC, we bought around 40,000 single-family lots. That’s when they were really nuclear waste, nobody wanted single-family lots. If it cost $200,000 to build a house that’s worth $180,000 lots were theoretically worthless. So we were buying lots for 3 to 5 cents on the dollar. And from there, we started to build out the lots, the subdivision, sell them to home builders, and actually back home builders. So we have a lot of experience in single-family. We’ve actually done 100 different transactions in a single-family space. Now, over 54,000 homes and lots, $7 billion of project costs, about $1.3 billion of equity, capital committed to those projects.

We really like the multifamily space. We have 25 assets we’ve done there, almost 9,000 apartment units, we’ve got $3 billion of project costs. Committed about $870 million of capital to that strategy. Industrial which we’ll talk a little bit about more later, we’ve done 17 assets, about 5.2 million square feet, about half a billion dollars of project costs, and about $100 plus million of equity committed to that. We’ve also done office, about six projects. We’ve been de-emphasizing office lately. We just feel not that there isn’t a good office story, but for the most part, we’re just seeing a lot better investment opportunities in other segments, particularly, as I said, in residential and industrial. We’ve done about half-billion dollars of office with about $140 million of equity committed to that. And other strategies we’ve done about 12 different assets between hospitality and other areas, retail about 1400 keys, 1.5 million square feet, about $300 million of project costs, and about a $100 million of capital equity committed to that.

So our residential expertise, if you accumulated all is about $2.1 billion of equity, capital committed to 125 projects, $9.4 billion of project costs were across 40 different U.S. markets. We’re very focused and Peter will talk about our market selection, but we’re really focused on where the jobs are going. So a lot of what we call the small the country through the sunbelt, 36,000 home building lots, 13,000 homes, 4,700 single-family rentals that we actually were one of the very early entrance to buying single-family rental. We’ve liquidated that entire portfolio of scattered single-family homes. And we’ve been more focused on what we call built to rent, which is building whole communities of rental homes, and about 8,400 multifamily units. As I mentioned, we really like the small the country and you can sort of see that from this geography. It’s really where the jobs are going, again about 9,000 units that we’ve done about $870 million in multifamily with a little over $3 billion of project costs.

So let’s talk about where we see the fund strategy to be. Markets move constantly, but where we see the big opportunity right now is a spread between what our development yields are and where, what we call spot stabilized cap rates, and that’s widened by about 75 basis points. So, we’re building plus or minus 200 basis points, which is the difference between what the yield on cost is, which is just simply net operating income over project costs, and where we can exit at. So it’s a huge development margin right now. As I’m sure most of you are quite aware that there’s a voracious appetite right now for stabilized assets. We’re seeing just massive demand. And so, we’re basically building into that demand.

So we’ve been building projects and doing when this strategy will be what we call merchant build, which just means we’ll buy the land, we’ll build the building, we’ll lease up the building, and we’ll sell it. And what’s interesting is we’ve actually been able to sell buildings sometimes way before stabilization and even before certificate of occupancy at a lot of times, because there’s just demand where we’re selling a project out west right now. We got over 40 bids for the assets. So the market is just really, really strong right now. We don’t see it letting up because there’s been so much money raised for that strategy. So we’re basically just selling it to that demand now.

This is what we call the development margin between 2021 and 2007, you can see how it’s really widened up for old assets, industrial, multifamily office, and retail. West cap rates, retail’s backed up a little bit actually. And as I mentioned, we’re avoiding retail, but if you can see what’s really happened is the market for stabilized assets has really grown, but what it costs us to deliver the project, although project costs have gone up, so rents have run even more so. So, we’ve been able to deliver a much wider development margin. And that’s really what this fund is taking advantage of.

So, it’s very thematic in sector allocation. So multifamily, which is just straight rental apartments. We’ve done a little bit of workforce housing, which we’ll talk about in a second, but for the most part, this is sort of bread and butter multifamily in the strong growth markets. We like the student housing sector, it has a countercyclical element to it, which we like a lot and we’ve been very active in the sector lately. And we’ve been really sort of, it’s more of a real rifle shot in certain areas where we see strong growth. We can get really good projects, really sort of main and main locations within universities. And we look for obviously universities that are growing with a supply story that’s not getting oversaturated. We like to manufacture housing and market-rate workforce housing markets.

This is non-regulated workforce housing, and there’s real of value creation opportunity from portfolio aggregation since there’s just so much money out there to buy completed projects. There’s been very little built in a long time in this segment. So we’re seeing a lot of opportunity right now to provide that, and other opportunistic strategies as I mentioned. We really like industrial, it’s really the opposite of what’s happening to retail. What’s bad for retail is good, you know, it’s really what’s happening and beneficial for industrial. We’re seeing just obviously the e-commerce story is just continuing to strengthen and just a voracious demand right now for industrial. We’re looking at some other areas like self-storage, medical office, entertainment, some select street retail, but very, very careful and cautious on the retail segment. So with that, I’m gonna turn it over to Peter who can really talk more about our investment thesis.

Peter: Thanks, Tom. For a growth-oriented investor like us active in new development, we obviously need to go where the growth is, to target the most profitable investment opportunities. And we spend a lot of effort studying markets and submarkets to define our focus areas. And the demographic picture of the last few years is really quite interesting. Long-term demographic drivers, such as the aging of the baby boomer cohort, their retirement from the workforce, millennials finally forming households in large numbers and longstanding affordability concerns are now colliding with the short term in fact over the pandemic. Factors such as work from home that leads to the need for more space and allows greater distance from the urban core, for instance, some pretty dramatic drops in labor force participation for certain groups and accelerated retirements as well as the greater openness for business in some states, particularly in the Sunbelt.

All of these are now colliding with the supply chain and the disruptions that are causing construction delays, cost increases, and really a lack of new supply on the market. These are pretty dramatic changes. Though they take time to trickle down to the real estate market, and so, we study both market trends and sector trends in quite a lot of detail in our research. This shows the most recent data for migration, for instance. It’s a familiar picture for most of you, I’m sure, with Sunbelt markets like Austin, Phoenix, Nashville, gaining population and gateways like New York, San Francisco, Chicago losing population, especially when international immigration is netted out. Amazingly, the 2020 census is still not available due to government delays. So we don’t actually have a complete picture of what’s happening during the pandemic, but indirect evidence strongly suggests that this trend toward the Sunbelt and the suburbs has accelerated, and of course, international movement has been particularly difficult.

We like to track things like U-Haul trips as people move around the country or cell phone movements in positions to get a more current understanding of these trends. And these demographic changes, particularly population change and migration generate strong demand in some places in some sectors but not others, highlighting the importance of market selection. Particularly for residential supply, it’s not where it needs to be today. As a result of the housing market dislocation more than a decade ago, the ongoing affordability challenges in the recent supply crunch, we are facing a pretty significant housing deficit. Freddie Mac estimates 3.8 million units. When you look at housing start all the way back to the 1970s, we are still below long-term average, and just barely now, coming up to a more normalized level that we last saw in the early 1990s. You see the red line here on the left-hand chart.

Of course, we had the housing bubble peak in the mid-2000s and then a long period of severe underbuilding as many builders went bankrupt in the aftermath of the crisis. When you compare unit completions to household growth on the right-hand chart here, we’re in a pretty unique situation today. New households and new units should be roughly in balance. That was the case in the ’70s, ’80s, and ’90s. When you account for obsolescence of course. We had too much supply in the mid-2000s. The red column here is higher for that period. But for a decade now, we’ve had too little, we have a deficit, as you can see. And this supply-demand imbalance is resulting in record-high occupancy and effective rent growth. We are currently at 97% occupancy in the apartment sector nationally, never seen that kind of number before in the history of this statistic. And it’s really just structural turnover vacancy, this 3%.

As a result of the tight market, rents are up double-digit nationally. Although this is spread quite unequally for now. Markets like Phoenix, Tampa, Las Vegas, seeing 20% plus rent growth while some gateway markets and particularly the Midwest are still down from pre-pandemic levels. They’re starting to catch up as you see here with New York City, but in the meantime, the Sunbelt has gone on to 30% plus increases. In the long run, population and income growth will determine market attractiveness. So we like to track it on this kind of matrix, where we plot median income growth and population growth on the axis. And you can clearly see a group of Sunbelt markets here in yellow that stand out from a population growth perspective and a very solid income increase as well.

There is a handful of what we call talent magnets markets that are slower growing, but where incomes are very high. And so, they end up in this upper portion of the chart in green places like San Jose, these days, Salt Lake City, Seattle, maybe even Nashville or other up-and-coming talent magnets, not necessarily in the Sunbelt, but some of are like Austin in particular. And then you have a group of older gateway markets in the Midwest that, unfortunately, have both relatively stable median income and not a lot of population growth. And in some cases, net population losses like Chicago or Detroit. Obviously, the markets to the right and up on this chart are the ones that we focus on. As a growth investor, we need to go where that growth is.

And this is just an illustration of our market selection framework. We spend a lot of time on demographics, population growth, migration trends, the aging of the population. We look at regional economic conditions. You may have population growth, but if it doesn’t come with income, that’s a different story. The third factor is affordability. Once again, you may have demographics, you may have job growth, but if the place is becoming unaffordable, such as the Bay Area, it is hard to actually grow and provide new product for new tenants or new households. And then lastly, obviously we’ll look at supply. That’s the other part of the whole equation. There are markets that are easier to build than others. They tend to be cyclical and occasionally overbuilt. We put all of these factors into a large spreadsheet and grade them in our own, maybe scientific way maybe some of that is just our market views from the team. But we come up with the ranking of markets. This is our current ranking. It changes about every quarter, not dramatically.

Obviously, the Sunbelt markets have been on top of this chart for a while, but they change positions, and every now and then there are some new ones that come up. Salt Lake City, in particular, we invested for the first time two years ago. Before that, Denver and Nashville became solid markets, and a decade or so ago, Seattle transitioned from a regional city to a global gateway and a talent magnet. With household growth and rooftops actually, typically comes retail. The twist this time is that that’s actually manifested in the growth of industrial logistics. And as Tom mentioned, we actually view this kind of in parallel. In the long run, population and income growth determined the household growth, but also the consumer base. And so, it’s an interesting twist because where rooftops pop-up retail used to go. Now, it’s actually industrial warehouse space.

And the story is familiar to almost everyone here by some estimates, the pandemic accelerated e-commerce adoption by almost a decade. You can see that in this blip here in 2020 and ’21, with record net absorption of space show on the right-hand chart here, but supply constrained by availability of land and construction costs. We’re also facing a supply-demand imbalance in this sector with vacancy down to 5%. And here is where the demographics and consumer preferences collide with supply chain challenges and companies are now building up inventory going through larger stocking in order to be able to deliver their products to market. A rule of thumb, interestingly, is that to generate a million dollar in sales, eCommerce providers need about 1000 square feet of industrial space while brick-and-mortar retailers require about 300 square feet here in the table below.

So with the shift of the volume to eCommerce, the need is for three times as much space on the warehouse distribution site, there will be some bounce back from this when stores and restaurants reopen, and we are back to in-person shopping, but a lot of this will stick. This is a changing behavior, and the longer we are forced to shop online for everything, the more sticky it gets. So, in a kind of dovetail to our residential strategy and what we call follow the rooftops, we’re also focusing a part of the portfolio on industrial space. That’s our broad general thesis. And just to illustrate a couple of recent projects that are not in the current fund, this is a new fund that we are just opening now, but in the previous iteration of this fund series, we had some examples of the type of investments that we’re pursuing.

This is an illustrative case study of a project in Boulder, an investment that we recently realized with a sale to a large nameless to be later named one of the top three tech firms out there and an opportunity zone, apartment investor. We sold this master plan project at a very nice 24% IRR gain and almost two times multiple. It was a mixed-use development in the city of Boulder located in the heart of Boulder junction close to retail amenities in a high-end shopping center, a perfect place for people to live and work and have fun. This is the location you can see across from Google’s campus in Boulder, and a very nice retail mall, just down the street.

Another example here, an illustrative case study from Vegas where we just completed an apartment project with 324 units with a partner who developed this asset over a three-year period. This project is in the middle of a large master plan undertaken by the city of Vegas including a large outdoor park, a new Cleveland clinic, a new performing arts center, and the children’s museum. The project delivered on time and on budget during the recession with a ground opening that we held last September, and it’s now almost 60% leased, a very nice 23% return on this project if we were to sell it today. This is a longer-term hold for a fund that invest over a 10 year period. So we’re not ready to sell yet, but it illustrates the kind of opportunistic return that’s achievable in the current market. Just to give you an idea of the growth of this entire location, the yellow outline here is the master plan, the museum in the middle, and our apartment project right across from the museum on a beautiful park with first-class amenities, a beautiful pool, gym, and tenant lounge areas with restaurants on the base level, overlooking the performing arts center in the park.

Similar project in suburban New Jersey where we’re building a 389 unit multifamily development and Hackensack. It’s about a half-hour commute from Manhattan, and really provides an affordable opportunity for households that need a two or a three-bedroom now that we are all teaching from home and working from home, but those kinds of units simply aren’t available in Manhattan. Ninety percent of the stock in Manhattan is one bedroom or less. And so if you need an affordable option with three bedrooms, you’re looking at a place like Hackensack, where you can still commute to work a few times a week, but you have your space at about a 30% discount. This is also located right on main street and close to Hackensack University Medical Center, walking distance, which has just completed a $700 million expansion and is among the top 10 hospitals in the nation.

And then lastly, just a quick look at an industrial project we just completed in Goodyear, Arizona, right next to the Goodyear Airport. We received an unsolicited offer for this asset, illustrating the kind of opportunistic return you might be able to achieve here. Again, it’s held in a 10-year fund, but if we were to sell at the number that we received an offer for, it would be 154% IRR. This is a particularly unique location right next to the airport and next to a giant Amazon distribution facility with UPS next door as well. And an infilled project that was a special location we found with one of our operating partners. So these are illustrative projects, not in the current fund, but describe the kind of opportunities we’ll be looking at. And just to quickly flash the key fund terms that this fund has a $500 million offering with a 20% gross IRR target, 15% net, pretty institutional style terms. We work with the largest pension plans in the world, in our other funds.

This is a continuation of that institutional strategy with all the governance in place. Interestingly though, I think very attractively, we are offering an 8% preferred return on this strategy. That means any distributions, any profit that we generate will first go to our investors until they receive their capital back plus an 8% preferred return. After that, we have our incentive waterfall as laid out here and we would be very pleased to let you know some of the detail that goes into subscribing if you reach out to us. So with that, I think we have run out of our time, but really appreciate you joining us today.

Jimmy: Fantastic. Terrific job, Tom and Peter. Thank you so much, really appreciated seeing that look at Symphony Park. I was there with you Peter a few months ago. I got to tour that right when you guys were opening that a great piece of property there in one of your previous funds. We have time for a couple of questions if you guys wanna hang out for another minute or two, we have a lot of questions in the chat here. If we don’t get to answer your question please do reach out to Peter and Tom. Peter and Tom, how can we learn more about you? Do you have an email address or should I direct people to your website?

Peter: Yeah, you can reach us on the website for sure. And my email is very simple. It’s just pciganik again like my name, at gtispartners.com.

Jimmy: Excellent. I’ll post that in the chat in a minute here, but a couple of questions. First one is what is the time horizon for this fund? And can investors choose to stay invested indefinitely?

Peter: Got it. So there is the time horizon to an opportunistic fund like this. And we like to think of it as a six to seven-year fund. It takes about two to three years to build these projects, stabilize them, lease them up, and really achieve the optimal value on sale. This will not be an indefinite pool. We do have a fund like that. That’s an open-ended fund where you can basically stay invested. It’s a little different structure, but this one will target opportunistic kind of return in the mid-teens. And for that, the appropriate time horizon is shorter.

Jimmy: Excellent. How aggressively will this fund use debt?

Peter: We’re not huge lovers of leverage, particularly on the construction side of things. The biggest mistake people made during the global financial crisis is in construction debt. When they levered up to 75%, 80%, that was normal back then. Looking back, it was not prudent obviously. When values dropped 30% on average nationally, suddenly people who had 80% leverage found themselves underwater, and the bank, in many cases, came and took the asset. There was no opportunity to recover value. It only took about two years for values to come back in another two or three years for them to double. But if you lost your asset during that crisis, you didn’t have that chance. So we like to keep leverage low or lower during construction. Right now, our prior fund is running a 40% leverage. That’s just where the previous fund vintage is right now. We do have a right to go up to 70%, but we really only do that once the projects are completed, stabilized, and cash flowing so that we have a collateral for something like a Freddie or Fannie loan at good terms.

Jimmy: Sounds good. Not too crazy with the debt there, then. Final question, then I’ll cut you loose and we’ll move on to our next presenter. When do you anticipate, you mentioned the supply-demand imbalance, how undersupplied we are in multifamily, in this country in particular, in many of these markets that you’re targeting. When do you anticipate that supply will finally catch up with demand? And is there a risk of overbuilding in some markets at some point?

Peter: You know, my quick answer to that would be never, but the footnote to that is that it really depends on markets. There are markets that are easy to build and they tend to be cyclical and have great demand. Places like Dallas come to mind, and what you need to do there is closely watch every project that comes online, and literally because they don’t even have zoning in some of these markets, you have to do it yourself and watch that supply very carefully. There are markets you just can’t build. San Francisco comes to mind. They have great income, maybe they won’t have as much growth. And then, there are kind of more stable markets where the supply just trickles in. Seattle, Denver, Tampa is another interesting market that has grown quite a bit and the supply will not come up suddenly there, but you need to watch it over two, three year period. We’re not seeing any particular market right now to be of concern, maybe a little higher on the supply in the Texas markets for multifamily, but we’re watching that and literally count the number of units that are coming up at different times in the next few years.

Jimmy: Very good. Well, we didn’t get to all of the questions. If you have a question that we weren’t able to answer, we’re out of time now, you can head over to their website, gtispartners.com or please feel free to reach out directly to Peter Ciganik, [email protected] I’ve posted both of those links in the Zoom chat. Tom, Peter, thanks so much for participating today. Really appreciate your time. Thank you so much.

Tom: Thank you, Jimmy. Appreciate it.

Peter: Thanks for having us.