Small Multifamily: Real Estate's $5T Opportunity (Part 1)

While larger assets and single-family homes are attractive targets to institutional investors, small multifamily buildings are ignored. A few operators are trying to change that.

Thesis Driven dives deep into emerging themes and real estate operating models by featuring a handful of operators executing on each theme. This week’s letter the first of a two-part series by Michael Falgione, co-founder and Managing Partner of Greenspace Capital. These letters will dig into investment opportunities in small multifamily buildings.

Of Blackstone’s latest $30.4B real estate fund, it is likely none of that capital has been earmarked for 2 to 49 unit apartment buildings. Institutions have categorically avoided small multifamily (SMF) assets, instead leaving them to mom-and-pop investors and small real estate private equity firms. As a result, small private investors own over 93% of small multifamily buildings in the United States.

But as a category, small multifamily is massive. In the US alone it is a $5.0 trillion asset class with 25.5 million units, representing 80% of all multifamily and 20% of the entire US housing stock. Yet institutions own less than 7% of the SMF market compared to over 41% of the large multifamily market sized at $1.2 trillion. For comparison, the biggest SMF investor owns around 8,000 units, while there are over 50 large multifamily groups who own between 25,000 and 115,000 units.

Clearly it is not the magnitude of the SMF category that has deterred institutions. Instead, the biggest challenge has been efficiently building a portfolio that achieves the economies of scale they need to generate sufficient investment returns.

However with recent economic shifts and technological advancements, a new category of operators believe that small multifamily will undergo the same institutionalization that the single-family rental market experienced over the past decade. Are we at the beginning of a new era of institutional investment into SMF? To answer this question, we’ll analyze the past, present, and future of this asset class by diving into the following topics:

• Past: Institutional barriers to entry from an economic and operational standpoint;

• Present: Investment strategies that are proving to be scalable - interviews with the founders of Veritas Investments, Groma, and Constellation Homes;

• Future: Predictions about where the SMF market is headed and possible investment catalysts.