Multifamily: The Quintessential Inflation Hedge, With Leo Backer

With the inflation rate hitting a 40-year high, many investors are looking for ways to protect their capital against runaway inflation. Multifamily real estate offers a powerful inflation hedge for those who are able to choose the right deals in the right markets.

Leo Backer, Managing Partner at Pinnacle Partners joins the show to discuss the multifamily strategy in their Opportunity Zones funds, and how multifamily is a strong asset class even amid economic uncertainty.

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Episode Highlights

  • The case for multifamily real estate investment as an effective inflation hedge. 
  • What some of the inflation-related challenges presented to Pinnacle OZ assets are, and how they have been navigated.
  • Why multifamily is such a popular asset class for Qualified Opportunity Funds.
  • Pinnacles has a multi-asset OZ-fund with “curated” products. What Pinnacle means by “curated” products in their multi-asset OZ fund.
  • An overview of effective deal sourcing strategy.
  • How the benefits of an early exit can outweigh the value of fully realizing the OZ tax advantages at the end of the required hold period.
  • How rising interest rates are impacting deal flow and approaches to leverage on multifamily assets.
  • What OZ locations Pinnacle prefers for their assets, and how they approach site selection.
  • Leo’s best piece of advice ever received for success in real estate.

Featured On This Episode

Today’s Guest: Leo Backer

About The Multifamily Investor Podcast

The Multifamily Investor Podcast covers trends and opportunities in the multifamily real estate universe. Host Scott Hawksworth discusses passive investment offerings in the space, including direct investments, DSTs, opportunity zones, REITs, and more.

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Show Transcript

Scott: Hello. Welcome to The Multifamily Investor Podcast. I’m your host, Scott Hawksworth, and today, I am joined by Leo Backer, who is a managing partner at Pinnacle Partners, which has opportunity zones funds specializing as well in multifamily.

And today, we’re going to be talking about opportunity zones, talking a bit about multifamily specifically in an inflationary landscape as well, and diving into a lot of different topics there. So excited to get started. Leo, welcome to the show.

Leo: Hi, Scott. Thanks so much for having me. Pleased to be here.

Scott: Well, thank you for being here. And I guess let’s kick it off with, you know, sort of the elephant in the room. We are in an uncertain economic landscape right now. We’ve had inflation really out of control over the last few months here. And, you know, I was looking at Pinnacle Partners and you recently had an article where you were talking about investing in multifamily during periods of inflation and how it can be a hedge against that.

Can you make the case for multifamily as an effective hedge against inflation?

Leo: Yeah, absolutely. And I’ll start by saying, you know, I think multifamily as an asset class is a good investment for inflation, but it’s very critical on which sub-markets and areas that you’re investing in multifamily, even more so. So, you know, multifamily, it’s a long-term investment, and with inflationary times, as costs increase and interest rates increase, if you’re in the right markets, you typically are able to pass through those costs to your tenants.

Unlike, you know, other product types where you’re locking into long-term leases. in multifamily, you have shorter-term leases that are increasing over time. So, you know, again, our long-term outlook on our real estate investments, you know, especially being in opportunity zones and in the markets where we feel confident that, in these inflationary times that, you know, the rent and expenses are increasing, that you’re able to pass those on to the tenants is why we believe that multifamily is a hedge against inflation.

Scott: Absolutely. But, you know, given that, okay, it can be a hedge against inflation, but there still are challenges with inflation. And I’m curious to the challenges presented to multifamily developers like Pinnacle. What have been some of the challenges from inflation you have seen and how do you guys navigate those?

Leo: Yeah. I would say the biggest challenge is the uncertainty at the time of our commitment to an investment. So, we have invested as early as closing on land with the sponsor in the pre-development phase and then riding through that, you know, pre-development, design, permit, through construction.

So, you know, in that scenario, your underwriting is such that you really got to believe to believe in your acquisition of the site. Is it a basis that you feel comfortable with? And that you’re underwriting on construction costs and all the way through, right? Your construction loan, your permanent loan, and all of that.

We felt like, when the markets over the last decade were increasing, you know, frankly, not a lot of people did wrong if you did it the right way. And now, with so much uncertainty, we believe we really got to come in later in a process, where if we’re going to close on land, you know, we’re going to be in an area that we think is just, you know, main and main, rock-solid location at a good basis, and then we still might take some time and come in with some risks for development with some of the uncertainty.

But more often, we’re going to be looking now at projects that are further along, that we can get general contractors looking at some real-time pricing for us and then adding, you know, increases to that. So, I would say the biggest challenge is, you know, our underwriting is pretty conservative. When we look at our sponsors’ underwriting, you know, it was at one level and we’re likely going to be below that because we feel like we want to, you know, outperform and under-promise and really be more conservative.

So, it’s getting tougher and tougher with our conservative underwriting to really find projects that meet our metrics. So, that’s really the difficulty we have in the market right now.

Scott: Right. So, if you were conservative before, and it seems to be that you’re even having to be even more conservative because you’re looking at this sort of uncertain landscape. Is that fair to say?

Leo: Yeah, it certainly is. And then that takes me back to markets that we’re focused in. So, we’re in certain markets for a reason, right? We believe in job growth. We believe people are moving there for quality of life. We believe people are… Their cost of housing as a percentage of their income is lower than in some markets. So, there’s a lot of metrics that we think there’s still a lot of runway.

Housing is an issue nationwide, right?

Scott: Right.

Leo: We still think multifamily, and especially the cost of… Even though, you know, buying a house today will be, you know, normalizing and maybe coming down a bit, it’s still unattainable for most. So, we still think in the markets that we want to focus in, that multifamily is going to be in high demand.

Scott: Absolutely. And I actually want to dive into some of the markets that Pinnacle is focusing on. I have it here. Seattle and Southern and Northern California, but then I know you have some fun projects that will be in Mountain States, southwest, southeast markets. Can you speak to a bit of the markets that you guys are in and what you like about them?

Leo: Sure. So, when we launched Pinnacle a little over three years ago, you know, we’re based in the Seattle area, so we started close to home. And we invested in four projects in the greater Seattle area. And those are either ground-up development and we did one adaptive reuse project in Tacoma, Washington. We got to California, frankly, with development relationships.

Our development partner in Seattle brought this workforce housing concept to Southern California and we invested in a project in downtown Los Angeles with them, which is under construction. And then another partner of ours is in Northern California with senior housing. So, that’s really how we got into those markets, through development sponsors, and that’s really our model is really best-in-class developers in each market.

And then we got to the Berkeley market through another development partner. We truly believe in the student housing is obviously a subset of multifamily. But certain, you know, universities around the country are extremely undersupplied and Berkeley is one of those. We have two student housing projects there. So, 10 projects in Washington and California, which then enabled us to really look at our portfolio with…

We have a lot of repeat investors. And several of our investors asked us to look at outside of those markets because they’re heavily invested in a multi-asset fund. And we chose multifamily as that asset class. And looking at kind of the markets we want to focus on, again, what I stated earlier, looking at job growth, you know, quality of life moves, politically-friendly environments, which is really focusing us in, you know, certain Mountain State markets down through the southwest and the southeast.

Scott: Right. And I think also there’s that piece, you know, we know that there’s a housing shortage across the country, but when you look at specific markets, you know, we’ve had a previous episode where we talked a lot about California and just the tremendous housing shortage there. So, when you’re talking workforce housing, is that just another factor where you’re looking at these markets and saying, “Hey, there’s a supply need here and it’s pretty significant.”

Leo: Absolutely. And I’m glad you brought up workforce housing because that is…we’ve invested in over, I think, 700 units of workforce housing, and one of those is really more of a true affordable. We’re not using any other government subsidies other than our OZ, you know, benefits and property tax benefits from providing a certain level of AMI. But workforce housing, we think, is really much needed, that missing middle housing around the country, and we are looking to duplicate that in other markets.

But as you can imagine, again, if it’s hard to pencil projects at a market rate in this inflationary environment, doing workforce is even harder. But we’re able to find partners that can find creative ways to build workforce housing, a lot of it has zero parking, close to transit, there’s smaller units, so you can get more units in them.

So, again, we are looking at replicating that in markets around the country. And we do think that is really one of the spirit of the OZ regs is providing to the greater good and workforce housing certainly is that.

Scott: Right. I mean, I think there’s that philosophy I like to highlight, which is, you know, do well by doing good and I think that really fits into your guys’ strategy and what you’re doing, right?

Leo: Yeah, absolutely. You won’t see us doing any high rise, you know, downtown urban projects. We’ll do market rate for sure, but there needs to be a story. I mean, obviously, we’re here to make money for our investors, but we are, you know, looking also at, again, doing the right thing and we do think that workforce housing is one of those product types, again, that is doing that.

Scott: Absolutely. I want to dive in a bit to your fund because it’s a multi-asset funds that you put together and use this word “curated,” so curated products. What do you mean by curated?

Leo: Well, I think it’s a fancy term. I’m not sure who came up with that term, but it’s really a fancy term to mean it’s not a blind pool fund. We wanted to have assets identified prior to our investors coming into our funds. So, we have two projects that are closed and curated, which is, again, that fancy word, but that’s what we mean.

We’re very focused on certain sub-markets and the two are Denver and Nashville, which we believe are two markets that are, again, very under-supplied. And, you know, the opportunity zones in each of these sub-markets are very interesting around the country. And some of these key markets we’re looking at, like Denver and Nashville, have a lot of fundamentals and kind of the next areas of growth, which happen to be right adjacent to downtowns, close to universities, close to stadium districts.

And so that’s what we’re doing. And we’re looking at, you know, dozens of deals every couple of weeks to really get to two. And we’ve got several more to round out the fund that we’re underwriting right now. It’ll be four projects in the fund.

Scott: So, when you’re looking at deals, can you, I guess, tease out a bit, what is your deal sourcing strategy overall?

Leo: Yeah. It’s really, you know, a few things. One, it certainly is our network, right? We’ve been in the OZ space for over three years now and made a pretty good name for ourselves, not only from the investor, you know, world, but also from the sponsors because, you know, it’s hard. It’s hard to put together joint ventures. It takes time.

It’s a lot of money to put together these structures and it takes a group like us, really, that has oversight and a history of managing these funds, these OZ funds. So, you know, we’re getting people coming to us for sure. We’re using our network. We have a partner, Jill Homan, who I know, I think, you’ve met. She’s been on a webinar with us. She’s back in North Carolina and we’re here on the West Coast.

So, we’re kind of using her network on the East and mine on the West and meeting midway. So, it’s really kind of a lot of outreach. We’re talking to a lot of economic development folks in each city that we’re focused in and really out there meeting with, you know, these best-in-class developers and getting introduced to quite a few along the way.

Scott: Right. So, casting a wide net, and then also, when you do find those great partnerships, leaning into that, right?

Leo: Yeah. And what we try to do is replicate, you know, projects with these partners, right? So, our deals on the West Coast, we’ve done multiple projects with several of our development sponsors. And that’s our goal, you know, going forward. Again, it takes a lot of time and money to put these partnerships together. And why not replicate them if you can? So, we’re really leaning on them to go out and find sites for us in these markets that we’re focused in.

Scott: A hundred percent. I want to talk about OZs a little bit, you know, because that is what you guys focus on. And multifamily is absolutely huge in opportunity zones. I believe the last statistic I saw was over 60% of opportunity zone funds have some kind of real estate component to them.

Why is multifamily, as an asset class, such a compelling and powerful asset class for opportunity zones specifically?

Leo: That’s a great question. And I think a lot of it just has to do with the hold period for the opportunity zones. You have to hold these for 10 years plus. So, for a long-term hold, it’s an asset class that you don’t see a lot of rollover at once, right? It’s a steady income stream through 10 years. There has to be…there are new developments or adaptive reuse.

So, other asset classes, it’s very hard to build ground up, you know, in an opportunity zone for office, for instance, you could do it, but then you’re doing leases with tenants that are maybe 5 to 10 years. So, there’s a lot more risk, you know, in a 10-year hold, in my opinion, for that asset class versus multifamily, which is, again, it’s a little bit more of a steady income stream and there’s, you know, supply and demand, right?

I think there’s just a little bit less risk investing in multifamily on the long-term than there would be on other asset classes, which a lot of people do very well in those markets. And we’ve invested in a couple of office, creative office buildings, but more opportunistic. But for our fund, we’re focused 100% on multifamily. And in that, you know, student housing, senior housing, market rate multifamily and workforce, you know, we think all of those product types are definitely really good for OZ long-term investing.

Scott: Absolutely. And, you know, one thing I might add to that, it just kind of makes sense when you think about it, when you look at the opportunity zones program and what the goals are, you kind of start with housing, right? Because if you’re trying to revitalize a specific area and you’re trying to drive job growth and all of that, folks need places to live and they need quality places to live, right?

Leo: A hundred percent agree. And that’s, again, like you said, doing good and doing well at the same time, right? And these zones are really interesting, right? It happens to be a lot of the zones that are seeing the most activity are close to transit-oriented, you know, light rail, and close to urban areas, but they’re just on the edge. So, it just seems logical, if you’re trying to get people to live closer to where they work, that I think that’s why you’re seeing so much demand in these different areas.

And I think once you get housing in these areas, then other product types will follow. You build housing, then what do you need? You need retail, right? You need office. So, I think you will see other investments around these areas, once you get more housing.

Scott: Absolutely. When we’re talking about the hold period, I’ve had a number of guests on where we’ve been talking about, you know, rental rate increases, maybe hold times being accelerated because of, you know, cap rates compressing and all of that. And we’ve seen, you know, just crazy run-ups of real estate values across the U.S.

When you are having a multifamily asset in an opportunity zones fund, is there a point, depending on the market and what’s happening, where the benefits of maybe an earlier exit ever outweigh the value of, you know, seeing through the entire hold with that opportunity zone? I’m just kind of curious to know if that’s even a factor.

Leo: Yeah. I mean, it’s definitely a factor. I think we look at…even though we’re a multi-asset fund, with these new two becoming four projects, we look at every asset on its own. It’s got to make sense on its own. It’s not a blend…yes, it’ll be a blended return to our investors, but we look at every asset, you know, on its own, and what is the right approach?

And, yeah, we’ll look at the marketplace at the time, at stabilization and the intent is to hold these for 10 years plus to get the OZ benefits, and that’s very likely what will happen. But, you know, 10 years is a long time, right? Like you say, and things change. And, you know, we’ve established a limited partner advisory board alongside our Pinnacle advisory board for the fund for those reasons, as we will be talking through, you know, updates with… And we’ll have voting rights with our LP advisory board that’ll be kind of oversight for our LP investors for things just like that.

We did sell a project in Seattle. Our very first asset was opening during COVID. And our county knocked on our door and wanted to acquire that asset. And we went to our investors and everybody voted to say, “Do we want to hold it for the 10 years or do we want to sell?” And they all voted to sell it because it was opening right during COVID at an area that was really going up, you know, and then with COVID, it was going to be several years before that market came back.

And we got a number that our investors were very happy with. And then we reinvested those funds into another QOF. So, you can do that as long as you’re reinvesting those funds.

Scott: Right. Right. So, maybe, I guess, to sort of put a finer point on it, there’s flexibility there to respond to individual markets, and then with that, you know, blended return that investors are seeing, you can make those decisions, right?

Leo: Exactly. First and foremost, we’re fiduciaries for our investors, right? What is the highest and best return for each asset? And again, we’ve got the safeguards in place, with our advisory board and our LP advisory board, with our experts to really look at these projects on their own. But again, the intent for multifamily, holding it for 10 years plus, these markets that we’re in, we feel very confident in over the long haul.

Sure, things are going to change over a decade, but we build in flexibility so you don’t have to sell after 10 years and one day. So, if the market is not there, then we might hold it for the 11th year or 12th year. So, we do have some flexibility to exit, you know, we hope at the peak of the market.

Scott: That’s the goal, right?

Leo: That’s always the goal, yes.

Scott: We’ve been talking about inflation, but, you know, in terms of combating that, the Fed recently raised interest rates by another 75 basis points and they’ve signaled a willingness to continue to do that. It seems like it’s not an if, it’s a when. I’m curious, how has this impacted deal flow and, you know, underwriting and leverage with your multifamily assets specifically?

Are you seeing that impact start to be felt yet?

Leo: Oh, yeah. No, definitely. I think I started by saying, you know, well, we need to make sure underwriting isn’t kind of on the edge, right? There needs to be some room for the what-ifs and here’s a what-if, right? So, you know, luckily, the two projects that we’ve invested in, and our others, you know, they weren’t at the bottom of our underwriting threshold. And, you know, we actually have an advisory board meeting on Monday talking about exactly these things, should we be changing our underwriting standards for our projects going forward because we think we’re conservative, even with these inflationary times, but we have some experts around the country and development and the debt markets on our board and property management.

So, we’re really going to be talking through that, but, yeah, we’re seeing more deal flow coming our way because people are losing equity. And then we’re also, you know, real-time with our projects, right? There’s different sources of debt that we’re looking at, debt funds versus just your traditional banks and/or putting more equity into projects. So, all of those things we’re looking at real-time, just to make sure we feel like our underwriting, again, over the long-term is conservative and has flexibility.

What you don’t want to do, in my opinion, in this market, is lock in to construction debt and then there’s…you got a gun to your head in when you got to, you know, convert to perm because then you’re really beholden to the market. So, we’re just trying to add as much optionality and flexibility with our sponsors. And back to the sponsor, that’s, again, another reason why it’s critical for us to be partnering with best-in-class sponsors that have not only GC relationships, but banking relationships and have that leverage with these banks to get the best terms we can and have the experience and been through cycles like this, you know, as we have.

Scott: Absolutely. Again, kind of shifting back to multifamily and opportunity zones. I guess, I’m just curious, you know, have you seen opportunity zones driving more interest… or I’m sorry, multifamily in general driving more interest in opportunity zones themselves from sort of the investment perspective?

Leo: Yeah. I think, you know, your typical passive investor, you know, a lot of our investors are first-time real estate investors.

Scott: Right.

Leo: So, you know, they’re coming out of, you know, long-term, you know, stockholders and the companies they work for, right, the Amazons, the Microsofts, and our backyard, etc. And, you know, so I think it’s a pretty good story to tell to them of why multifamily. And I think investing, again, in a higher risk could be higher reward, office, industrial, others, you know, are a little bit more volatile potentially. And timing is way more important in that product type, in my mind, than in multifamily.

So, yeah, I think that’s one reason. The second is the locations where these opportunity zones are. Again, they’re prime for multifamily in these markets that have been under-supplied and this private equity in opportunity zone equity coming in in lieu of the institutions is going to be as important as ever in these inflationary times as a lot of your institutions now are really on the sidelines.

They’re not funding ground-up development. So, having private equity coming in is allowing more and more of our investors to come into these projects than maybe we’ve ever seen.

Scott: Right. And, you know, I was just speaking to opportunity zones and sales. I have conversations with folks and they’re like, “What is an opportunity zone?” And I think sometimes when I start with, “Oh, you know, I host “The Multifamily Investor Podcast,” and then there can be that piece of, “Oh, and there are these multifamily assets that are located in an opportunity zone.” “And what’s an opportunity zone?”

It kind of flows the conversation, right?

Leo: Right. Exactly. Yeah. And I didn’t say this, but we’ve said it on your podcast before or on your webinars before. But, you know, even though we’re investing in opportunity zones, our underwriting does not take into account any of the increased returns to our investors for opportunity zone investment. So, we have to be a net IRR to our investors at what we believe is market for the risk-reward, and then the benefits above that.

So, even though it’s in an opportunity zone, we aren’t paying any more for the land and we’re not underwriting any differently. So, you know, opportunity zones just does allow us to get more investors into our investment pool that happen to have capital gains.

Scott: Is it fair to say the opportunity zone is the cherry on top of the sundae, but you’re making sure it’s a good sundae?

Leo: Exactly. And again, you know, it’s tough, but it’s some of our projects that are already under construction, maybe that cherry is what’s helping these projects, right, because you need that. You need that cushion. But we aren’t going to go into new projects that believe the cherry is all your return. Right? So, you’re exactly right.

Scott: I like to ask this question, especially as we sort of wind down our discussion here. What’s the best piece of advice you’ve ever received for success in real estate and from whom?

Leo: Oh, yeah, it’s a great question. I mean, I’ve had a lot. I’ve been in real estate through…I hate to say how long, but since the mid-’80s. And I think I’m going to give one that really is more, you know, for our fund and for building Pinnacle out because my career has been in development, but it’s really been a consultant for developers and bringing…you know, helping them lease and sell buildings, so, really on the brokerage and development side and really creating a great team.

But I’ll tell you, the best advice that I got was from a friend of mine, Bill Pollard, who also was a 25-year kind of… one of the top commercial real estate, you know, capital markets brokers in the Seattle market, started a large development firm maybe over a decade ago. But he said, you know, “Very first thing you need to do is you need to set up your back office.” He said, you know, “It’s great to run fast and put all these projects together and raise all this money, but if you don’t have the back office that’s ready to support you as you grow, you’re going to fail.”

And sure glad we did because we hired… We picked the top CFO way before we should have or needed to, not should have been needed to, and, you know, Sandi has just proven to be, you know, a rock star. And as we’re expanding, you know, her role is just getting more and more valuable. So, I would say, you know, especially for what we do is just in fund oversight and making sure our projects are OZ compliance and all, back office, back office, back office.

Because putting deals together, yeah, there’s a lot of experts out there that can kind of underwrite, they can look at deals, but making sure you’ve got a great team around you supporting what you’re doing and really having your eyes on the LP investor, that’s what we’re about. So, that is what I would say.

And I’m going to add a second one just because it’s related.

Scott: Go for it.

Leo: There’s another friend of mine, Tom Lindquist, who is also a real estate developer. And when I was telling him about our multi-asset fund, he said two things, “Being bigger isn’t always better, right, so stay focused on what you do well,” and then he said, “Don’t forget your initial investors, your day one investor, because even though these are 10-year holds, remember investor number one as well as you remember investor 200.”

So, it sounds basic, right, but just great advice. Just always remember who your clients are, who your fiduciary is. And that was two great pieces of advice for us.

Scott: I think that’s fantastic advice. And to your first piece of advice there, you know, that really gels with something that I tell folks when they come to me and they say, you know, “What should I be looking for? I want to invest in multifamily passively.” I say, “When you’re having those conversations with a sponsor or whoever, ask about the team. Ask about the track record, but ask about the team because that is just so critical because if you have a good team in place, that’s going to really up your chances for having success.”


Leo: Yeah. You got to know what you’re good at, but you really got to know what you’re not good at. Right? And really plan for that. And we’ve done a really good job at that. So, we think we’ve got a great team and our team is expanding as we scale. And can we do everything…can we do better?

Sure. But we learn every day and we think we’ve got a great, you know, base of a group going forward and excited in the OZ space. So, we still think there’s a lot of runway there.

Scott: Absolutely. That is what it’s all about. Leo, I want to thank you so much for joining me on the show today, sharing your insights and your story and the great things that you all are doing over there at Pinnacle. And if folks want to find out more, they want to connect, where can they do that? Where should they go?

Leo: Yeah. So, our website is And my email is [email protected]

Scott: Awesome. And we’ll, of course, have links to all of that in our show notes. Thanks again, Leo.

Leo: Thanks a lot, Scott. Take care. Bye-bye.