This July, Blackstone Real Estate Income Trust announced plans to acquire AIG’s interests in a U.S. affordable housing portfolio for a whopping $5.1 billion, in an all-cash transaction.
The AIG deal is Blackstone’s latest affordable housing play. In May, the firm revealed that it would buy roughly 5,800 apartments in San Diego County from the Conrad Prebys Foundation for $1 billion. At the time, Blackstone stated a goal of keeping the rentals affordable to residents earning 80 percent or less of the Area Median Income (AMI). Back in 2015, when Blackstone purchased Stuyvesant Town-Peter Cooper Village complex in New York City, it agreed to keep 5,000 of the property’s units affordable for at least 20 years.
Blackstone plans to rehab the affordable housing properties it acquired from AIG, according to Kathleen McCarthy, global co-head of Blackstone Real Estate. She said in a statement “These communities provide critical affordable housing, and we look forward to being long-term owners. We will make significant investments to improve the apartments while ensuring they remain affordable and in compliance with all rent regulations. We are committed to working with our partners in this sector to expand the supply of affordable housing.”
Blackstone declined to provide comment to WMRE beyond its announcement.
AIG had owned and managed its affordable housing portfolio for more than 30 years. In a statement, the investment manager said that while affordable housing assets were “attractive investments,” they were no longer core to AIG’s long-term investment strategy.
But AIG seems to be in the minority, at least when it comes to institutions and private equity firms like Blackstone investing in affordable housing. One big reason for this interest: meeting environmental, social, and governance (ESG) goals.
Last year “shed light on numerous systemic issues throughout our country,” says John Williams, president and CIO of Avanath Capital Management LLC, an investment firm that focuses on affordable, workforce and value-oriented apartment communities. “This highlighted the increasing need for more institutional capital investment in underserved communities, and as a result, there has been a growing interest in ESG.”
Across the globe, investors are increasingly embracing ESG strategies. The 2020 RBC Global Asset Management Responsible Investment Survey, which includes responses from more than 800 institutional investors, found that 75 percent of respondents are integrating ESG into their investment approach.
“Increasingly, RBC GAM’s institutional clients are looking to the business community to stand up, speak out and invest in areas that help drive change for our broader society including affordable housing,” says Ron Homer, chief impact investing strategist at RBC Global Asset Management.
RBC GAM’s strategy specifically targets projects that increase the supply of affordable housing. For example, it recently invested in MLK Gardens in Englewood, N.J., a state which ranks ninth in the country for the highest cost of living. The average monthly rent at the property is $443 compared to an average of $2,560 for a one-bedroom rental in the same area.
Comprised of 100 units of affordable rental housing, MLK Gardens is restricted to families that earn 80 percent of the AMI. Roughly 78 percent of renters are considered “extremely low-income.” Almost all residents are Black (94 percent), and 89 percent are women-headed households.
“Foundations, public entities, family offices and corporations have begun to take a greater interest in using their investable assets to improve their communities—all without trading off the opportunity to earn a financial return,” Homer notes.
Avanath’s fourth affordable housing fund, for example, was oversubscribed when it closed in 2020. The firm’s original target was $550 million, but it ultimately attracted $760 million in equity commitments, according to Williams.
Avanath has focused on ESG since its inception and made ESG core to its investment strategy, Williams says. Currently, the investment manager has $2.6 billion in assets under management across 13 states and 49 cities. Its portfolio consists of 90 communities with more than 11,000 units.
“We believe that we will see more fund managers focus on ESG in their investments moving forward, and we anticipate that more private equity will enter the affordable housing space over the next several years,” Williams says.
Long-term sustainable alpha
RBC Global’s survey found that 84 percent of respondents believe ESG-integrated portfolios will perform as well or better than non-ESG-integrated investments. Moreover, 55 percent of those surveyed agree that achieving long-term sustainable alpha through integrating ESG factors is possible, compared with 36 percent who said so last year.
“We believe that there is a symbiotic relationship between social impact and the financial performance of an asset,” says Antonio Marquez, managing partner of Comunidad Partners. “We have been able to demonstrate empirically that positive social and environmental returns translate into alpha in financial returns… Affordable housing is a strong investment class, but affordable housing that also incorporates social impact tends to result in higher performance and better long-term outcomes for residents and investors.”
San Diego-based Comunidad’s strategy is to revitalize affordable and workforce apartments in infill locations and implement its specialized cultural management platform. The unique program includes cultural upgrades, community investment initiatives and social impact programs that help build a sense of community.
Earlier this year, Comunidad partnered with global investment manager to acquire Village at the Creek, a 603-unit affordable and workforce housing community in Clarkston, Ga. in an off-market transaction. This particular location within the Atlanta submarket is known as “the most diverse square mile in America” and houses immigrants, migrant, and refugees who have come to the U.S. seeking a better life, according to Marquez.
Village at the Creek represents the Comunidad’s fifth acquisition in the Atlanta market, bringing its total holdings in the area to more than 1,566 units. To date, the firm has invested in more than 40 communities throughout the country totaling more than 10,000 workforce and affordable housing units.
The firm’s focus on social and environmental impact was one of the major reasons real estate investment management firm Nuveen Real Estate decided to partner with Comunidad, according to Pamela West, managing director, global real estate, impact investing at Nuveen.
“We were extremely attracted to this community for several reasons,” West says. “First, it is located in an economically and culturally diverse neighborhood that is poised for continued growth. Secondly, it is closely tied to our focus on impact from both a social programming standpoint and long-term preservation perspective.”