Multifamily Residences an Area of Opportunity

Q: What is the biggest issue in the Mexican real estate market?

A: In 2019, the biggest challenge to securing and starting new development projects was permitting. We saw a complete halt in the permitting process for all real estate developers in Mexico City, which has significantly impacted the construction industry as a whole. ADI (Asociación de Desarrolladores Inmobiliarios) reported that since July 2019, approximately US$7.2 billion in investment has stopped or been diverted due to the uncertainty surrounding the sector. Projects that once were fairly feasible are not as feasible today because developers will not be able to deliver the project on time.

In real estate development, certainty regarding time frames is crucial. We need to have relative certainty of time frames for the permitting process so that we know when we can better estimate the start and duration of the development period.

Q: How has this issue impacted Greystar’s operations?

A: We have been impacted by permitting in a mixed-use project on the Mexico City-Toluca highway. The project is a 45-floor tower, with 455 units that is part of a larger master planned project consisting of office and for-sale residential uses. Construction was stopped for five months because of permit issues. Though the project has already been reopened, the five months it remained closed had an impact on development timeline. We have another project in the Reforma area of Mexico City where our planning has also been put on hold because of permits.

Regardless of the uncertainty, there has not been a significant impact in terms of construction costs. The lack of certainty regarding time frames has been our biggest hurdle. Capital is exiting the Mexican market and moving to projects in the US or in Europe where the permitting and development process is established and respected.

Q: What are the market niches that Greystar has identified in Mexico?

A: We focus 100% on rental housing. The main characteristic of this product type is that we own and manage all the units and the building itself, so we are able to centralize and control all operations, ensuring the best living experience to our residents. We are starting to explore opportunities in student housing, but we remain focused on the multifamily sector.

Multifamily projects have interesting opportunities in Mexico City. As a point of comparison, Houston has a population of over 6 million inhabitants and has over 500,000 multifamily units, whereas Mexico City, with a population of over 20 million inhabitants, currently has less than 2,000 institutional, purpose built multifamily units in the entire city. In this sense, we see a great opportunity for this type of product since supply is still far from meeting the demand.

Q: What characteristics does the Mexican market have that contribute to the success of this product?

A: Mexico City is a major center for employment and commercial activity. We target large employment centers with high density of workers where available housing options are very expensive or nonexistent, such as areas in Santa Fe or the Roma Norte / Condesa neighborhoods. Like other large metropolises with high costs of housing, citizens of Mexico City are forced to live on the outskirts of the city and to spend several hours commuting to work on public transportation or in traffic. This in turn has a heavy impact on the person’s quality of life. We see multifamily as an ideal option for citizens who want high quality, secure, and well-located housing, as well as a way to bring vibrancy and diversity to existing neighborhoods.

We also find an opportunity when competing against existing informal rental product in the market. The majority of non-purpose-built rental product are not designed or managed for efficient living, with large unused spaces, inadequate amenities, and suboptimal attention to the resident. By owning and managing our own residential buildings, we are able to control and enhance the entire residential experience, from the moment a potential resident steps on to the property, through the leasing and move-in process, dealing with any maintenance issues, and providing access to all amenities.

Q: In which geographic areas of the country do you see the most opportunity for Greystar’s products?

A: We are mostly focused on Mexico City because of the size of the market and the imbalance of demand to supply. Guadalajara, where we currently own and operate our 230-unit asset Stratto, is also an interesting market, since it is a very dynamic city with a great deal of commerce and job centers. We also like Monterrey for the same reasons as Guadalajara and are actively seeking opportunities to expand there.

Q: How have Greystar’s multifamily products been received in the market?

A: In has been a positive reception. At Stratto, our asset in Guadalajara, we are seeing that residents are willing to pay a considerable premium on a total rent and m2 basis compared to the non-formal rental competition. We attribute the willingness of residents to pay this premium as a recognition of the value-add services we offer at our residences.

Q: How will Greystar make a difference in Mexico’s real estate market?

A: As the global leader in rental living, Greystar is setting the mark for all future multifamily projects In Mexico. Through our global support system and the years of experience managing this type of product, we expect the multifamily industry to continue to grow. For example, we currently focus on the higher end of the rental spectrum, but we are working on to offering institutional rental residences that focus on other socio-economic sectors.

As an investment, multifamily continues to prove its stability as an asset class in real estate. Multifamily is a perfect hedge in both a bullish and bearish environment. During a downturn, individuals are less likely to purchase a home as a residence or investment and turn to rental housing. During boom times, increases in prices, aka inflation, are captured in rental growth. Multifamily assets are an important part of any institutional investor’s portfolio.

Q: What are Greystar’s expectations for the next two years?

A: We were expecting 2020 to be a year of growth. Although we started out the year strong, underwriting and making offers on several projects, our plans, much like those of the rest of world, has been put on hold due to the COVID-19 crisis. We are focusing instead on ensuring that our residents at Stratto are safe and receiving our support during these difficult times. For the projects we have in development, we continue to work to maintain delivery as planned and ensure the safety of all those involved. We continue to search for new projects but with the current environment we expect most of those plans to be pushed to Q3/Q4 2020 or into 2021.

Q: How has the COVID-19 pandemic impacted the real estate industry?

A: There is no doubt that the COVID-19 crisis has impacted the entire real estate industry. On a broad level, hotel, retail, office, and for sale residential are feeling the biggest impact due to the restrictions in travel, public gatherings and ability to work from an office. For multifamily, specifically, we expect to fare better than other real estate products since at the end of the day, citizens are staying home and will always need a place to live. On a positive side, the crisis is allowing us to demonstrate the importance of how a professionally managed residence can adapt in order to ensure the safety and well-being of its residents.

Greystar is a leading, fully integrated real estate company offering expertise in investment management, development, and management of rental housing properties globally. Headquartered in Charleston, South Carolina, Greystar manages and operates over an estimated $165 billion of real estate in nearly 200 markets globally