Private equity real estate

For want of a definition, we can say that ‘private equity real estate’ firms are small firms that invest a lot of capital (100s of millions at a time) in real estates. Before the financial crisis of 2008/09, such firms directed a lot of capital in 30-year mortgages of single family owner occupied homes. As you know, a lot of new financial products were created. Then the whole thing went bust.

After the financial crisis of 2008/09, these private equity firms realized that a 30-year mortgage is a big risk, because if the homeowners in an area lose jobs in large numbers due to economic downturn, then that sets off major cascading effects throughout the economy, as everyone is familiar now. So, instead, post-crisis, these private equity firms directed a lot of money in multifamily rental apartments. Since a rental lease is for one year, they figured this is much less risk.

They would buy a big apartment complex of say, 1000 apartments for, say, 100 million. The income from rent (after operating expenses) gives about 6 to 8% in multifamily sector (it varies within different real estate sectors). But loans have been available so cheaply, ever since the crisis, since interest rates are so low, that they could leverage with borrowed capital to get returns in excess of 20%. Thus huge amounts of capital has been going into, and continues to go into the multifamily real estate sector.

As one can see, to run this operation successfully, they need to have information on vacancy rates, rental prices, etc. which, in turn, is dependent on economic and demographic information. So, a Big Data platform that ingests from data sources on demographics, income, migration, etc., could provide a lot of investment leads — figuring out where to buy those 1000 apartments from. This is what my platform has been trying to do.

I focused on private equity real estate firms, because among the business people I met here in New York, there has been a predominant focus in multifamily rentals, in the post-crisis years. I have tried to develop the platform with the help of real use-cases by talking with businessmen and identifying their needs.

Many PE firms in multifamily rentals have been able to make returns above 20%, consistently since 2011. This is on investments amounting to 10s of billions of dollars, based on the simple strategy of borrowing capital cheap and collecting rent. This kind of returns outperforms the returns in high frequency trading, derivatives trading, arbitrage trading, quantitative trading and all other strategies that involve a lot of complicated mathematical models and/or real-time data feeds. So, this demonstrates that there is a compelling opportunity in private equity real estate, for a new generation of quants on Wall Street who can take a different approach based on Big Data.

To understand the multifamily rental sector better, please look at this list of corporate firms who are in the Top 50 Multifamily apartment owners in the US:

This list has several financial institutions including familiar names like J.P. Morgan Asset Management at #11, UBS at #22, AIG at #36.

Also, please note that the #1 firm, MAA, owns 99,393 apartment units in 2017. Then please look at this list of firms who are in the Top 50 Multifamily property managers in the US:

The #1 firm Greystar manages 415,634 apartment units in 2017, and the each of the top 5 manage at least 100,000 units.

Basically, the apartment owning firms are the capital owners and they have a lot of analysts, but the data is proprietary to the property managing companies who have a long history of operating the real estate properties. However, while the property managing firms, have all the data and the operational knowledge, they don’t have the analytics to know how to use them. This analytics is provided by a separate set of companies — e.g., CoStar,  Xceligent, CompStak, Yardi, RealCapital Analytics, etc. These companies provide an intermediary function with their basic suite of analytics that can be quickly done in spreadsheet templates and passed around.

As an aside, we note that established firms in real estate software, like CoStar and Yardi, have been around for 30 years, and as a result are forced to maintain a lot of legacy computer systems and codebase. So it would be difficult for them to move to a Big Data infrastructure. 30 years is a long time for a tech company, and in this time, it has built a network of customer relations. To retain their customer base, they try to provide all the services that their customers could possibly need. So, to keep them happy, they choose to build an umbrella organization by buying smaller firms, as an alternative to focusing on technology on their own. This is their business model. This situation is well-understood, and hi-tech Silicon Valley startups know how to successfully execute a disruption strategy in this situation.