By Alex Pascale

June 19, 2024

A question we’ve been asked over and over again is …why did we “run” from the shiny/sexy institutional multifamily real estate world? I mean you have the expertise and broker/capital relationships to continue to do big deals and make a name for yourself quickly, so why deviate?

A fair question given it seems that most are trying to break into that world – whether you’re an owner trying to trade up, a broker trying to make a bigger fee or a property manager looking to scale their platform – and here we are going smaller…

One thing (among many) that I took with me from the early part of my career in the San Francisco technology startup world, in working with and evaluating many of these companies, is how much the great ones think about their “TAM” or Total Addressable Market, and how to expand it over time. One of the reasons they do this is because the VCs that fund them want to deploy their capital into companies that are tapping into a massive market opportunity with tons of use cases and potential customers. They want their portfolio companies to be swimming in an ocean-like pool of revenue opportunity as a habitat for success.

At Vintage, one of the principles we subscribe to is that outsized returns are inversely correlated with market efficiency. This concept was foundational in defining our own habitat for success.

We were fortunate to study under/work alongside some very intelligent institutional apartment real estate investors and picked up ton of great concepts/strategies/execution knowledge but, candidly, also identified a lot of things we would do differently when building an investment company of our own.  One thing that we became painfully aware of was that we were playing in an extremely efficient marketplace. An efficient marketplace with very well capitalized competitors, who are well staffed, calling on the same broker relationships, accessing the same datasets (and in some cases better), executing the same business plans, etc. In short, it’s really tough to find outsized risk-adjusted returns when you’re buying a deal that is owned/operated by Blackstone, managed by Greystar and being sold by CBRE (all massive, astute players in the institutional multifamily world). Frankly, it’s so efficient, it can feel like you are buying/selling publicly-traded bonds, and the winner in these competitive marketing processes was just the group who was willing to pay the most – aka underwrite the lowest exit cap.

Conversely, the sub-institutional space is chock full of inefficiency to exploit from an investment standpoint. Detailed below are a number of the key points we’ve honed in on that make the sub-institutional space attractive to us:

Massive Opportunity Set

• • Institutional capital flows have not yet tapped the opportunity set at scale; the institutional impact on the similar asset class of scattered site single family rentals this past cycle was tremendous
  • There are an estimated 14.3 million units within 2.7 million sub-50 unit multifamily properties across the U.S. per NMHC

Transaction Inefficiencies

• • Lack of sophisticated management leads to significant upside in majority of opportunities
  • Highly fragmented, under-capitalized and largely “Mom & Pop” ownership produces a general lack of scale / ownership fatigue as well as more reasons to sell (“the three Ds”) which creates consistent deal flow
  • Highly fragmented brokerage results in a consistent stream of mis-marketed opportunities

Built-In Advantages

• • Sub-institutional multifamily tends to be better located and in more walkable “main and main” locations due to parcel size and looser zoning regulations when much of the stock was built
  • The bite-size nature of single-asset sub-institutional multifamily allows for exit optionality to less sophisticated high net-worth individuals typically targeting turnkey stabilized assets

Taking advantage of these key inefficiencies, is why we are choosing to play in the sub-institutional space. We strongly believe that having a good “entry point” into the real estate (aka what you paid for the asset) is the best way to ensure a successful investment outcome, as it’s something you cannot change. Finding an inefficient marketplace to identify attractive entry points is the first and largest building block. And (good news!) we’ve already seen this play out in our favor with our first acquisition in San Diego which is a great acquisition story (for us real estate nerds). I’ll spare the details at this time for the benefit of my small reading audience who I am so grateful to getting this far down the page.

Sub-institutional multifamily is how we define our own habitat for success at Vintage, and today that spans the markets of San Diego, Orange County and Phoenix. While the inefficiency of the marketplace is the main reason we intentionally choose to focus here, there are a number of other reasons why we like this space which I may have to dive into on another blog post in the near future!