Sentinel’s Nicholas Stein On Multifamily Investment in the U.S. and Australia

Nicholas Stein is a managing director at Sentinel Real Estate, an independently owned real estate investment firm founded in 1969. Today, the firm has $9.6 billion of institutional-quality real estate assets under management among nearly 120 domestic and international clients, mainly in the multifamily space across the U.S. and Australia, where it oversees more than 29,000 apartment units in 134 properties.

A former United Nations worker, Stein transitioned to commercial real estate finance in the early 2000s, helped unwind the wreckage of the 2008 Global Financial Crisis, and is now responsible for portfolio management of two of Sentinel’s commingled funds. Moreover, Stein is the most junior member of the firm’s investment committee, despite a nearly 20-year tenure at Sentinel. 

He sat down with Commercial Observer to discuss a whirlwind career, the nature of Sentinel’s funds and CRE strategy, and why Australia multifamily is simply worlds away from the U.S. 

This conversation has been edited for length and clarity.

Commercial Observer: Tell us about your career. How did you get involved in commercial real estate finance? 

Nicholas Stein: I’m on my third career. I’m a true career switcher. As a kid growing up in New York City, I was always very interested in government and international affairs, and thought I was going to take a path in that direction. 

After undergrad, I went to the Foreign Service School at Georgetown, which was very much catered toward going into the State Department or into some form of intergovernmental organization. So, my first three years of professional life were all in the United Nations and nonprofit world. I briefly worked for the United Nations High Commissioner for Refugees and for the U.S. Association for the United Nations, basically the fundraising arm of the U.N. here in the United States. And then, ultimately, for a group called the Asia Society in their policy and business unit, which was also really focused on political and government-related issues overseas. 

However, at age 24, I sort of looked around, particularly having done a couple stints overseas, and realized that I didn’t really want to live abroad in refugee camps for my life. So I came back and did what many do who are uncertain, and I went to law school. 

I graduated from Georgetown Law in Washington, D.C., and ultimately practiced for three years at a firm here in New York called White & Case, where I worked in their project finance group, a leveraged finance legal practice with a focus on infrastructure and real estate, and that’s what educated me on the real estate landscape.

How did you transition to Sentinel?

I started doing deals as a lawyer for some developers. These were high-end hospitality developments in the Caribbean, so far afield from where I am today, but I was more passionate about what the developers were doing than what the lawyers were doing, and, so, at that point, I really took a step back and said, “How do I transition into the business side of the real estate world?” 

I knew I didn’t have a lot of experience, so I was willing to take a step back and start at the beginning, and Sentinel offered me an amazing opportunity. They valued my legal experience. 

At that point, this was back in 2007, they had a number of different structured finance deals that were underway — they had bought a public real estate investment trust and taken it private. It had a bunch of complicated debt structures in it — and they thought it was somewhat complementary to bring in someone with a legal background into portfolio management, to work on some of these initiatives that were a little further afield from their core business. That was really my entry point into real estate. 

You operated two closed-end funds that you liquidated in 2010 and 2015. Could you walk us through your fund management experience?

Sentinel has always operated a series of private partnerships called the Partners series, ranging from Partners I to Partners VI, and I worked on Partners IV and Partners VI. 

Both of them were primarily suburban apartment investment vehicles in the core and core-plus lanes. They had slightly higher leverage than what you would think of as a core vehicle today. One had a debt cap of 55 percent, the other may have been 65 percent. They were mainly differentiated by vintage, that they started in different years, so the assets themselves were slightly different ages, slightly different profiles upon acquisition, as the market heated up from the early 2000s going into that 2007 period. 

But they were not that different in terms of the strategies, and both were somewhat similarly situated coming out of the GFC, which is they owned good real estate that had been devalued, and needed more time to allow the market to recover. 

And, really, my first initiatives, when I sort of was brought into those vehicles, was to extend the lives of those closed-ended funds and request from the investors more time to allow the market really to heal, which in both cases was granted, so they were both meant to liquidate around 2010 and 2012. We pushed those time horizons out to 2015 in order to give them more time to recover. 

Did they recover? 

Well, they recovered substantially from where they were. Partners IV, which got bought earlier on, had a better recovery just because the basis and the real estate was a little bit better. But those were great years for multifamily recovery, so they both saw substantial recovery during those periods. 

They ultimately needed to be liquidated, and one of our lessons as an organization around that time was it was a little confusing having different products that were essentially buying the same real estate under very similar strategies. They were really only differentiated by the year they began. And, so, we decided to try to consolidate our business, feeding into our belief that you want a well-diversified portfolio, particularly in the course phase. 

While multifamily overall provides a lot of consolation to investors, individual deals can be highly volatile, and we wanted to see a little bit more scale than some of these smaller private partnerships allowed for. 

What came next?

As those vehicles liquidated, we encouraged our investors to join our Sentinel Real Estate Fund [the firm’s $3.3 billion primarily fund]. That is also a core apartment fund. It is open ended, and it’s been around a really long time — we started that fund in 1976. It’s one of the longest-running open-ended funds in the market. It was not always an apartment-only fund. At one point, it was a diversified, open-ended vehicle. It always had an emphasis on apartments, though. 

After the GFC, we also saw a very specific opportunity in apartments. We thought it made a lot of sense to turn Sentinel Real Estate Fund into an apartment-only vehicle, deciding very consciously at that point to focus on the suburban investment opportunity. So one of the big differentiators over the years, for the fund, has been it’s really a pure-play, suburban apartment fund. We’re investing in sort of high-density suburbs outside of large urban centers all over the country. 

What attracted you to the suburbs as opposed to cities? 

In the early 2000s, we started to buy more urban high-rise assets — in many cases, in sort of the high-growth Sun Belt areas. Taking advantage of the thesis, we bought in Downtown Denver, Dallas and Houston. What we saw during the GFC was that urban assets really underperformed our suburban portfolio. They were being held at lower cap rates, so, as cap rates changed, it created a lot of volatility, and they were also just bigger deals, so they had an outsized impact on the vehicles because of their size. 

In 2010, we were coming out of the foreclosure crisis here in the U.S. Single-family homes were really cheap, but they were out of favor. And affordability became a more important theme in housing decisions: More and more younger Americans would age into family formation in rental housing, and we thought the suburbs would be where they’d want to live in order to take advantage of school systems, more affordable rents, larger apartment footprints, access to outdoor space. 

And, at the same time, you were beginning to see the baby boom generation reach retirement years in 2010. We expected that to happen. Fast forward to 2024, if you look at who the new renter is in the United States, it’s the 55-and-older renter. In both cases, we see the suburbs as real beneficiaries of that demand group, and that’s sort of where we decided to put all our eggs. 

How is the Sentinel Real Estate Fund structured?

It’s all equity. We own 100 percent of the equity on all the deals in that fund. We could partner with folks, but we found that, particularly in a core vehicle, maintaining control is sort of an element of managing risk. So it has been sort of our preference to be the majority or sole shareholder in those deals. 

So there are no debt investments in those vehicles. We do use modest levels of leverage at the property level to enhance our diversification, but we’re a very low-leverage player. The leverage in that vehicle, just by way of examples, is about 25 percent loan-to-value. We believe that is sort of an attribute of a core vehicle. 

One other sort of interesting note, going back to 2010: At that point, there really were no open-ended apartment funds — exclusive apartment funds — in the core space. And we spent a lot of time at that point trying to get investors comfortable that a single-sector fund could work. Just by virtue of that concentration, many folks looked at us as a riskier investment. Today, there are many competitors in this space, but one of the ways we tried to build the fund was to really check all of the other boxes of what should be in a core fund from a diversification perspective, and a liquidity perspective, and managing joint ventures. 

I think it’s allowed the investment community to get increasingly comfortable that single-sector vehicles can meet that core definition. 

Your headquarters are in New York, but you have offices in Australia and Amsterdam. What is it like to play in those spaces? 

This really predates me and goes back to John Stryker, who took the company private and ultimately was the chairman until 2019 when his son took over. He was sort of a very early believer in international fundraising, and really targeted the Australia and Dutch markets because they were two of the countries that were very early to create mandatory contribution systems into their 401k programs. 

In both countries, by law, a certain percentage of everyone’s paycheck goes into their defined benefit program. As a result, back in 2000, when this happened, the thought was that these two relatively small but fairly wealthy countries will have ballooning pension systems that they will be forced to invest overseas because they’re too small a country to invest locally. So the goal was to be an early entrant into those markets on the fundraising side. 

What surprised you about investing abroad? 

In Australia, what we found is when we went there and started describing U.S. multifamily, no one knew what we were talking about. What we quickly learned was that U.S.-style multifamily — where a single sponsor owns all the units in an apartment building and manages it internally or externally — didn’t exist in the Australian market. And it was not because you didn’t have a lot of renters there. If you look at their demographics, its share of renters is almost comparable to the U.S. — something like 35 percent of the population rents. But the way historically you financed the development in Australia was you needed to presell units in order to get construction financing. It was a condominium model.  

And, as a result, you didn’t have any owners that owned the entire building. Their belief was that multifamily is really inefficient as a business. The belief there was it was not really an institutional business either. So our thought was to come in and introduce U.S.-style multifamily management, which we think brings those operating efficiencies that you need to be successful in this model. We developed the first purpose-built multifamily property on the continent about six or seven years ago. 

What’s the best investment advice you’ve received in your real estate career?

My career began in the era of debt being free. As we came out of the GFC, interest rates went down, and then they stayed down for this prolonged period of time until the last couple of years. Despite that, though, Sentinel has always looked at leverage as an enhancer, but a risk. 

Ensuring the real estate works on its own without relying on the effects of capital structures in order to generate the return is, I’d say, sort of a hallmark of the way we think. We always ask our acquisition folks to underwrite the real estate deal unlevered. We want to see whether it stands on its own two feet before we put it in complicated financing structures and cap structures. It’s a very simple concept, but it really stands behind our sort of philosophy of how we want to think about real estate, which is to succeed through net operating income growth rather than through complicated capital market strategies. I think it has served these vehicles well. 

Brian Pascus can be reached at bpascus@commercialobserver.com.