Greystar’s Bob Faith on Building a Global Multifamily Empire
(And the importance of a little thing called "equity")
Bob Faith, the founder and CEO of Greystar, started out pursuing a career in the oil business at an early age, but fate (and the economy) had other plans.
The Charleston, S.C.-based developer, investor, owner and operator of multifamily and student housing properties currently has $25 billion of assets under management, operates 400,000 units across the globe and has around $8 billion in properties currently under development.
Faith, a 54-year-old married father of three, founded Greystar three years after he co-founded Starwood (STWD) Capital with Barry Sternlicht in 1990. The duo took an entrepreneurial approach to the savings and loan crisis, snapping up distressed debt and REO properties with a particular focus on multifamily assets.
Today, Greystar is constantly expanding its business through the acquisition of companies as well as assets. For example, last year, the company privatized the Monogram Residential Trust private real estate investment trust—a $4.4 billion portfolio comprising 48 properties—in the largest multifamily transaction of 2017.
Commercial Observer: I hear that you were almost a petroleum engineer.
Bob Faith: Yes, I grew up in Tulsa, Okla. My dad was a civil engineer and worked for a large oil company. His general philosophy was that if you go to college you’d better get a degree that you can get a job with. So I went to the University of Oklahoma and got a petroleum engineering degree, which—growing up in Oklahoma in the middle of the oil business—made a lot of sense, but by the time I graduated in 1984 it was a bust and there were no jobs. That was my first lesson about operating in a cyclical industry. So, I decided to go to business school and was accepted at Harvard Business School.
How did you end up in the real estate business?
I was 20 years old at Harvard and most of my classmates were 28 years old. I couldn’t even drink beer yet. When it was time to look for a summer job I wasn’t sure that “Bob from Oklahoma” was ready to go live and work in New York City, so I looked for a summer job elsewhere. There were a lot of successful Harvard Business School alumni in the real estate business and quite a few that worked for Trammell Crow, one of the leading private developers in the U.S. at the time. They had offices across the country so I interviewed with them and got an offer to go back to Oklahoma City for the summer where they had a warehouse and office development business. I found that I really liked the entrepreneurial spirit of the real estate business because it’s very deal-oriented.
What was your role?
Well, I started out as a leasing agent and they basically handed me a stack of business cards and a map. There’s something great about the experience of coming out of Harvard and thinking you’re hot stuff and then being thrown out of office buildings for being a solicitor.
What did that experience teach you?
I think one of the great skills in life is sitting across the table from someone and getting them to say yes to something you’re trying to get done. That’s true whether it’s a 2,000-square-foot lease you’re trying to get signed or a $1 billion deal you’re closing. What matters is how you position what you’re doing in a way that makes sense to them; that’s the critical part of any negotiation.
How did you transition to the development side of the business?
George Lippe, who became the CEO of Trammell Crow when they went public in 1997, gave me the opportunity to move to Charlotte, N.C. in 1988 to head up development operations. It was actually a ridiculous promotion because I hadn’t done any development in Tulsa because it was in the tank from the oil business.
Charlotte’s economy was rocking in the late 1980s so I got a lot of experience developing and Trammell Crow’s business model at the time was very interesting. The banks would basically lend you 105 percent; 100 to buy the building and 5 percent so you could pay yourself a development fee. You’d go build the building, fill it up, sell it for 120 percent of cost and keep the profits. It was a great model when real estate values were going up, up, up. But that model hit a wall when the tax law changed in 1986.
We were building a bulk warehouse building and Wachovia was our lender. We went to a meeting and said, “We want to borrower 105 percent of project cost,” and our banker said, “Guys, the regulators are in town and are changing the way we do business. You guys are going to have to put equity in this deal.” I remember us looking at each other and saying “equity?” That was a huge “aha” moment for me that the world was changing. Companies like Trammell Crow were set up to build their empires with bank debt on the premise that real estate values were going up every year. But in the new world you needed equity, so I thought, “Well, I better get some of that.”
And a Starwood was born?
Well, Barry [Sternlicht] and I were classmates at business school and so while I was toiling away at Trammell Crow and learning the real estate business from the ground up, Barry had gone to work at JMB Realty in Chicago and was learning the deal side of the business. We had another business school friend, Dan Stern, who was running a family office for the Burden family in New York, which is a branch of the Vanderbilt family. This was 1990 when the savings and loan crisis had hit and the Resolution Trust Corporation was taking over, and Dan said, “You know what? If you guys started a company we’d back you with capital. Why don’t we start a fund and go try buy some of this distressed real estate and debt?” And that’s how we started Starwood Capital Partners.
What were you buying back then?
We were buying both distressed debt and REO properties. There was a lot of land and multifamily available, but we focused more on multifamily because it had cash flow. The reason that there was a lot of multifamily available is that savings and loans had a housing mandate from the federal government, so they made most of the loans on multifamily apartments.
I hadn’t done apartments before, Barry hadn’t done apartments before, but they were selling them cheap so we started buying. That was the beginning of me falling in love with the multifamily business, because what I recognized is that even in the midst of a recession you can always fill apartments up, and they can cash flow at a fairly low occupancy. As long as you don’t have too much leverage on them you can always survive to fight another day. That fed into the resiliency of the multifamily asset class and really struck a chord with me, having grown up in a cyclical oil business. It doesn’t mean the downturns won’t come but they are so much less pronounced in the multifamily sector because demand is demographically driven rather than cycle driven.
A downturn must have been an interesting time to learn about an asset class.
Absolutely. Office buildings have always been the sexy asset class of the industry—who doesn’t love a big glass tower?—so the multifamily side wasn’t nearly as professionalized as the other sectors and the reason for that is there had been a lot of tax benefits to multifamily properties that kept it as a family business.
When we started Starwood we were racing around the country and gobbling up multifamily properties. Then, in 1993 another business school classmate—one thing I learned from business school is that connections help— Steve Quazzo, was working for Sam Zell. Sam was going to take his apartment company public as a REIT [Equity Residential, or EQR] and he wanted to have more scale and be the largest REIT in existence at the time. [Starwood] had about 10,000 units at the time so we merged all the apartments we’d bought into Sam’s company as part of the EQR’s IPO. It was a home run for the investors and a great day for Barry and me.
Why did you and Sternlicht decide to part ways?
Barry wanted to move back to New York and to focus on hotels and other asset classes but I really loved the defensive nature of the multifamily space and the way it’s not so cyclical in a cyclical industry. At the time we were using third-party managers to manage our portfolio and I saw an opportunity to professionalize the space. A lot of institutional capital was starting to recognize the benefits in multifamily and so I thought, why don’t I start a company that focuses on institutionalizing the multifamily space.
How was Greystar named?
The “grey” part of the name is for a little company called Greystone I bought in Houston, Texas, which managed around 10,000 units. The “star” was a tip of the hat to Starwood where I raised my money to be able to start this company.
How has Greystar’s business evolved since then?
It’s been quite a ride but we haven’t changed our vision as a company; we’re focused on rental housing. We started in Texas and our clients grew with us across the country. We were growing on the back of investors who wanted more exposure in more markets and our clients who wanted us to operate the buildings. Another lesson I learned during the financial crisis of the ‘80s is if you over-lever assets it doesn’t matter if they have stable operating characteristics and if you put too much debt on them you can get hurt. So we’ve always had a very conservative financial model. Ever since I learned you need that equity stuff [laughs] back in 1988 we’ve always made sure we have plenty of equity in all of our deals so we can go through cycles if we need to.
Was the savings and loan crisis or the global financial crisis most impactful to the multifamily sector?
Those were the only two cycles in my career where every single market went down at the same time. The way it usually works is you have little rolling regional recessions based on the economy, but you had two major things happen: there was demand crash in every single market, and every single kind of business was paralyzed. Money just stopped flowing so the way people got in trouble was through the lack of liquidity. What was different between the two was that it took a long time to recover from the crisis of the 1990s because it took a long time for capital to flow back into the opportunities in real estate at that time. When Barry and I first started Starwood our competitive advantage wasn’t that we were wise, because we weren’t. We were young guys. But we had capital at at time when nobody else had capital.
In 2008 things got paralyzed and a lot of people started pulling capital out and selling assets at the exact wrong time but capital came back to multifamily more quickly; a lot of international capital flowed back in.
How did Greystar fare through that time?
A lot of our competitors were wiped out—Fairfield [Residential] for example went through bankruptcy—but that was actually the beginning of a growth trajectory for us. We didn’t have a lot of corporate debt and if you have a cash-flowing business you’re pretty healthy and can go on offense, which is what we did. We started acquiring other companies that were in distress and buying sites from banks. Even though the global financial crisis had hit, the U.S. population continued to grow and we were highly confident that people were going to want to live somewhere [laughs]. Homeownership had become a dirty word, and that was a good thing for us as rental landlords so we started setting our plans for aggressively growing our business.
And today you have a global business.
The U.S. is a massive part of our business, 80 percent, but we have a large business in the U.K, two offices in Latin America and we just opened offices in Shanghai and Sydney. Greystar owns the third largest student housing portfolio in the U.K and we’re the largest student housing operator in Spain.
How does the multifamily sector differ in London from, say, New York?
What’s really different is the institutional ownership of the whole building as a rental property. It’s not that people don’t rent in London, they do, 50 percent, in fact. But there are very few purpose-built institutionally owned buildings that are 100 percent rental. On the other hand, in the U.S. student housing is a tiny segment of the multifamily industry, 5 percent, but in the U.K. that segment grew first. So student housing is an accepted institutional asset class but not purpose-built rental.
How do you fund your acquisitions?
We have some of the largest institutional investors in the world—everything from sovereign wealth funds to domestic pension funds, endowments, family offices, you name it—and we have a series of funds and separate accounts.
How did the Monogram Residential Trust deal come about?
We had known the team at Monogram for many years and were very familiar with the company’s assets, which were of high quality and located in some of the best markets in the country. As we were deep into the process of preparing to launch our new growth and income strategy, we decided to approach the company’s management to privatize their public REIT as the seed portfolio. We, as well as our investment partners, viewed this transaction as a unique off-market opportunity to jumpstart the strategy by acquiring a collection of irreplaceable properties at an attractive valuation.
Do you think that multifamily is still perceived as the safest asset class from an investment perspective?
We continue to have a lot of strong interest from global investors as it’s a very safe way to invest in the U.S. The great thing about apartments is we typically have one-year leases so if inflation comes back we have a great hedge because we can raise rents.
Can you pinpoint when multifamily was recognized as an institutional asset class?
Coming out of the savings and loan crisis in the early days there were entrepreneurs pursuing it like myself and Barry Sternlicht, who had capital from family offices. But you started to see firms like Goldman Sachs and Morgan Stanley come in with funds and start to invest in the area. They had a lot of institutional investors in those funds who started viewing multifamily as pretty interesting. The second key thing was when Sam Zell took EQR public in 1993. It was very successful and gave people exposure to the asset class even though it was through their public securities arm. So it was a bit of an evolution but all of those things led to more visibility in the space and the sector’s performance— with lower volatility and as high returns as many other asset classes—started to get people’s attention.
What’s some advice you’d give to someone entering the business today?
I have three kids so I’m in the business of giving career advice. I’d say go work for a company that excels in what they do in an area that you have interest in. Don’t worry so much about getting it right in your first job, just get in the game and work hard.