Stewart: Insurance investors are looking for ways to add investment income, at the same time, looking for non-correlated asset classes. Single-family rentals is a very interesting asset class that can do both and may provide an inflation hedge. We’re very fortunate to be joined by Anthony Cazazian, Managing Director and Head of US Residential Real Estate for the Man Group. Anthony, you go by Caz so I’m going to say, welcome, Caz, how are you?
Anthony: That works great. Hey, Stewart. I’m doing great. And I really appreciate having the opportunity to speak with you and the audience today.
Stewart: Our pleasure. This is interesting. I mean, I’ve heard of this asset class, don’t know much about it. The person that always gets to learn the most on these deals is me. So not only are you doing single-family rental, there’s also a net zero energy component to this, and I want to cover all that, but can we start off with an overview of the US housing landscape today from your perspective?
Anthony: Yeah, absolutely. It’s interesting. There’s a lot of people who would say the same thing that you just mentioned, “I don’t really know much about single-family rentals.” Maybe I’ve seen some headlines or heard about it more recently, but I’m not that aware of it. And I say it’s interesting to hear that, always, from my perspective, because when you think about US housing as a whole, I think of it as the largest and most liquid real estate asset class in the world. And then, when you break US housing down by unit type, single-family homes represent the largest component, and single-family rentals is a massive segment within that, representing over 16 million units. And so it is a massive market. It is, again, from my perspective, the largest and most liquid real estate asset class in the world, and is one that has only garnered institutional investment and interest really over the last decade or so. With a lot of headlines, I would say, an interest and capital being invested really only over the last couple of years.
Stewart: And for those not familiar, would you just give me an overview of Man Group and your experience in the resi real estate market?
Anthony: Absolutely. And if okay, I’ll start with the very high level 50,000 foot view here. So Man Group is a UK headquartered, publicly traded investment management firm with about 150 billion of AUM. That AUM is comprised across five investment engines, four of which focus on public market investments; and one of which focuses on private market investments, where I sit, which is called Man GPM. GPM stands for Global Private Markets. Within Man GPM, we have over three and a half billion of AUM. The majority of which sits within US housing investments, both debt and equity. Within the equity component there, our focus today is predominantly on single-family rentals. And on behalf of our clients, we own and invest in over 4,500 single-family rentals across 18 markets in the US, and continue to grow the portfolio.
Stewart: And so, everybody knows that the housing market has gone crazy in terms of pricing, at least where we live, outside of Chicago. We were in Florida recently, seemed like the same story. So, it seems like parts of this market may have simply repriced. I mean, my econ 101 hat says that when prices go up, there’s a fair number of people who are going to not be able to afford that house and will be in the rental market, which seems like a tailwind for you. Have I got that right? Can you kind of talk to me about the supply and demand components there?
Anthony: I think it’s exactly that, which is the primary driver of pricing, as in many things in general, it’s supply and demand. And so today, from a single-family home perspective, inventory is effectively at all-time historical lows. And in many markets, that inventory represents less than one month’s worth of supply, where historically in, what I’ll call, a more normalized market, you would see three to six months of inventory within a given market. And so, supply is extremely constrained. How do we generally solve for that? We build additional homes. And up until, really, last year, since the great financial crisis, we had been under building and certainly we’re building far below the historical averages.
We only recently really hit the historical averages and are expected to be above historical averages for the next several years. But, there are constraints that are slowing down that new supply today, in addition to already being at historical lows. And that is, at the municipality level, just the processing of permits and everything that’s needed to really have homes completed and brought to consumers and residents. And then, second is really supply chain constraints that are still impacting the speed and timings of delivery here. And, that’s just the supply side.
On the demand side, we are seeing a tremendous amount of demand for single-family homes and single-family rentals, primarily driven by the largest age cohorts in the US, which are generally represented by the millennials. Those age cohorts are entering life’s major milestone years, generally getting married, having children, needing more space. When you need more space in the US and you’re looking for more than three or more bedrooms, you’re generally focused on a single-family home. And so, you have the largest age cohorts needing more space and pushing into single-family homes and rentals at a time when supply is at all-time historical lows and new inventory is delayed for certain structural reasons.
Stewart: And so you’re focused on single-family rentals, why not multifamily? And if you want to wrap in, how have you seen the single-family rental space evolve?
Anthony: So, I think in many ways, the asset classes are complementary to each other. To be honest, I think they cater to different residents, different consumers, different age groups, different demographics, et cetera. And so I, in general, am a believer in US housing across the different segments within US housing. We particularly have been focused on single-family rentals as it has been a newer asset class from an institutional investment perspective. And, we believe that allows us to utilize some of our expertise and skillsets in a different way and allows us to deliver outsized returns to our investors. We generally, as the firm, certainly within our US housing group, try to focus on more complex, less crowded investment opportunities. And that’s what we’ve seen in the single-family rental space over the past decade, and maybe that lends itself to the second part of your question in terms of the evolution.
So, single-family rentals are not a new investment class. Retail investors have been investing in the asset class for many, many decades. What is newer is, institutional capital investing in the asset class, and that really started post the housing crisis and post the great financial crisis. And so we had some of the earliest institutional capital, including Man Group, invest in the asset class, starting in 2011 and 2012. And that’s what I would consider the early innings of institutional investment in the asset class. And so for example, we began investing in existing homes, effectively aggregating one home at a time in 2012. We began expanding our channels in 2013, where we started forming relationships directly with home builders, where we would buy new homes direct from the builders within their generally homeowner-dominated communities. And then in 2014, we expanded even further into build-to-rent developments. These were purpose-built rental communities where we are starting with the acquisition of land, developing that land, and then vertically constructing the homes.
So the space, fast forward to, let’s call it, COVID, I think attracted some institutional capital, but the wave hadn’t really begun yet. And that was for a variety of, I would say, reasons. Many remained on the sidelines until a point in time when enough questions had been answered in their minds. And four primary questions that needed to be answered was: was this just a trade or a business, the investment in this asset class post the GFC? Two, could you acquire these assets and manage these assets in scale? Three was, what would an institutionally-owned portfolio look like over time from a performance and KPI perspective? There had been no real track record to point to. And then fourth was, how would this asset class perform in a downturn or stressed environment in an institutionally-owned format?
And that last question is really what kept people, many institutional investors from insurance companies to pension funds, et cetera, on the sidelines until really COVID occurred. And, I think COVID was an opportunity to prove out the resiliency of the asset class at a time when the first three questions I mentioned had been answered in the eyes of many institutional investors. So, fast forward through COVID, you now have a supply-demand imbalance. You have additional tailwinds with focus on work from home and a changing landscape that some perceived, at least for a portion, to be a permanent change, the adoption of technology, video conferencing, lower focus and reliance on commute times to work, et cetera, et cetera. And you have this asset class that is just primed to grow and attract capital on one end from the institutional side, and also residents and consumers all the way on the other end. As a result, you have this ecosystem, this asset class that is evolving very quickly as we speak and has, what I view to be, positive support momentum for many years to come.
Stewart: It’s interesting that you mentioned it. I want to make this distinction. You mentioned buying existing homes, but Man Group is building to rent. In other words, you’re doing, and you mentioned this, but I want to call it out because I think it’s important, you are an innovator in net zero energy build-to-rent. So, that takes the innovation another step in my mind. You’ve got a project that you’re starting in Charlotte, North Carolina with an institutionally backed build-to-rent zero energy, single-family rental community. Can you talk about that, and how maybe you’re solving for a need there?
Anthony: Yes, really appreciate the opportunity, too, because I’m personally and we are all really excited about what we’re trying to do here. Maybe I’ll start with a little bit of Man’s DNA as well before I even get into the single-family rental side of it. As a firm, we’re very focused on ESG and RI and incorporating principles into our investments. As of, I think, year end, over a third, which represents 55 billion of our AUM, integrated ESG into its investment process. We as a firm, last year, joined the Net Zero Asset Managers initiative, committing to the attainment of net zero emissions within our investment portfolios by 2050. We’ve committed to achieving net zero carbon in our global workplaces by 2030. And then more specifically on the private market side in what we call real assets, we focus on impact investing via our community housing strategy. And then within US and single-family rentals, we’ve begun to focus on net zero energy home building and a single-family rental communities.
Stewart: That’s what they call in Missouri, putting your money where your mouth is.
Anthony: We are trying. And I think it’s imperative that we all… This is a topic that is becoming, and should become, near and dear to everyone going forward.
Stewart: Is it fair in your mind that by building net zero real estate, that seems to me that there’s going to be a difference in resale later? Right? I got to think that focus on, for the lack of a better term, the house’s emissions, this is like going back to the 70s where a car was just choking out all kinds of stuff, and today, much less so. Do you see that as… I mean, that seems like it’s going to be a market factor in the future. I have no data to back this up by the way, Caz, none, but this is my sense of it.
Anthony: I think you’re absolutely right, and there are some data points we can point to that would lead us to believe that will occur. I’ll back up for a minute or two here, just in terms of our evolution on the build-to-rent side. So we began build-to-rent in 2014. In 2018, we made the conscious decision to have all of our build-to-rent developments and the homes within those developments built to Energy Star certification standards, which was an important step and unique step, I think, for us and the market at that time. And certainly, it was part of our innovation. And we have seen over the years since then, an appreciation from our residents and consumers in general around that. I don’t know that we can necessarily point to valuation differences yet on that end, but certainly from a rental perspective, those assets have been very attractive to residents.
Fast forward to today, it’s been, again, more of a natural evolution for us to take it one step further and go from those Energy Star certified homes to these net zero energy homes, where we’re going to be making the envelope even tighter, incorporating even more modern features, and then adding solar to the roofs. And I think over time, that is going to not only potentially allow us to have a differentiated product from a rent perspective, but also from evaluation perspective. And when you think about the future of home building down the road 10, 20, 30 years, now this is kind of a really down-the-road thought process, ask yourself, do you think we’re going to be building homes to the same energy efficiency levels we have been for the past 10, 20, 30 years, or is it going to look radically different? And I would put my bet on that it’s going to look radically different.
Stewart: Yeah. And I got to think that the ROI on solar, for example, as that becomes more mainstream, that’s got to help your ROE if you’re using that technology. I mean, we’ve looked at putting solar on our house, I think it makes a ton of sense, but that option is getting cheaper and more viable. Is that fair?
Anthony: We believe this is an opportunity to do good and do well at the same time.
Stewart: Yeah, exactly.
Anthony: There are a lot of investors that don’t see it that way yet. We will take that opportunity to sort of lead the pack and have others follow. And I think there will be a lot that will follow very quickly. You mentioned the project in Charlotte. So, we view it as the first institutionally backed build-to-rent net zero energy single-family rental community in the US. We’re going to be building more of those, and are really excited about the future and the opportunity there. You had mentioned evaluation, just to back up a minute on that topic. There are analogies that we are seeing in real estate sectors, for example, in the office sector, particularly in Europe. And certainly, Europe is further ahead of the US on these topics and investments, but I think the US will catch up quickly.
You see class A office buildings that have certain “green” certifications or lead standards, et cetera, that are being differentiated from a rent capture perspective, from a rent growth perspective and from an evaluation perspective. And, there’s actually now enough data and research out there that is showing that differentiation whereby if you have that class A green certified product, there’s effectively a wait list for your tenants. Whereas if you are not green certified, or you’re in a class B office product, you are having a hard time filling up your space. And, we think you’ll start to see that across different real estate sectors and asset classes in different markets over time. That momentum and that idea is going to continue to grow. And the idea of retrofitting by the way, it’s a lot easier to build to those standards from the start than it is to retrofit assets, particularly homes to a net zero standard, for example.
Stewart: Oh, yeah. Yeah. And I mean, if you think about where we are in the war world today, I think that companies who are looking to rent space want to do their part with regard to net zero. And that’s, I would think, a big part of the decision making process when they’re selecting office space and I would think that the same would be true about, if I’m looking at two single-family rentals, and one’s net zero and one’s not, it seems like that potentially influences my decision as well.
So our listeners are insurance investors overwhelmingly, and insurance companies have some unique characteristics. Everybody and every minute of every day, it’s inflation, inflation, inflation. You hear about it. So, for an insurance company, inflation is a double-edged sword. It increases the value of the liability and it decreases the value of their core bond portfolio, which is a really challenging situation. In the regulatory regime that most of those folks operate in, they are sort of required to have this large core bond allocation. When an insurer is looking at single-family rentals and adding that to the portfolio, can you talk about two aspects? One, diversification; and secondly, how does single-family rental perform as an inflation hedge?
Anthony: That’s a great question. So we have seen a ton of interest from the insurance community in single-family rentals. I think there’s still a lot of research and thoughts of allocation into the asset class as we speak. Certainly, some insurance companies have already invested in SFR, but I’d say, they still have a long way to go but there’s a ton of interest. And, it’s for some of the reasons that you’re alluding to right now. So single-family rentals, by definition, offer a tremendous amount of diversification just because of how granular the asset class is. Right? This is not a $100 million or $300 million office building or regional mall, or what have you. It is an individual home that could range from $200,000 to $400,000 as an example, and a portfolio of those homes across many markets. So it’s an extremely granular and diverse asset class that is not correlated in the same way that other core real estate sectors are.
When you look at the correlation between multifamily to retail, to office, to industrial, it’s interesting, they are actually quite highly correlated to each other as asset classes, whereas single-family rentals is by far the least correlated across all those groups. And, a big reason for that is the ownership base. Right? The majority of single-family rentals are owned by retail investors. Institutional ownership within single-family rentals today generally stands at roughly 3%. You’ll see some different quotes anywhere from kind of 2% to 4%. And that percentage will grow over time, but it’s nowhere near the institutional ownership of any of those other kind of sectors within real estate. So you have this extremely granular, extremely large, extremely diversified asset class that is less correlated to other real estate sectors and other assets in general, while at the same time, has generally outperformed inflation over the past 30 years and is an inflation hedge with leases that are generally resetting every year or every two years, if you have a longer term lease. And so for all those reasons, it’s an extremely attractive asset class to institutional capital and insurance capital.
Stewart: And there’s also an ESG component here too. I mean let’s not forget that. When you’re building net zero, when you say SFR, that stands for… it took me a minute to get the connection, is single-family rental. Right? There’s a diversifying aspect, there’s an inflation hedge, and there is an ESG component. Is that fair?
Anthony: I think that’s absolutely right. And there’s different levels, varying degrees of which you can incorporate ESG and RI into the investments within single-family rentals. When we are acquiring an existing home and renovating it, we are generally replacing appliances with Energy Star certified appliances, replacing old lighting with LED lighting, low-flush toilets, things of that nature. We’re improving the community by investing in and improving assets within a community. We’re bringing kind of much needed housing to the marketplace. So that’s sort of one area of how to describe how single-family rentals can be focused on the ESG side of it.
The other piece is on the build-to-rent side, as we’re describing. We think that that’s really where we’re making a big push, where we’re building net zero energy homes. And that is not only bringing much needed supply to the market, it is also impacting, helping to offset the crisis that we face from a climate perspective. And then it’s bringing to bear a lot of the topics that our consumers are now much more aware of, and care much more about today, from wellbeing to climate change, to their communities and how their homes and their living environment impacts their communities.
Stewart: And, there’s been an important change at the NEIC for life insurance companies that makes holding real estate more attractive. What’s the update there?
Anthony: Yeah. So, certainly, I think part of increased interest, certainly recently, that we’ve seen from insurance companies is a result of recent changes to risk-based capital requirements that have been favorable towards real estate. In addition, I think it’s also fair to say that ESG is now more of a focus today for US insurance companies than it was historically, especially in private markets. So, without getting to too many specifics, and I’m certainly not the expert per se, but the RBC factor has been reduced a decent amount, which is allowing for direct investment in real estate, or JV and fund investments within real estate to increase effectively from an insurance perspective.
Stewart: Yeah. And I mean, I think that the regulatory relief in the life space really helps those folks. I mean, we’ve got lots of friends in the life business, and I know that that regulatory relief is a big help. As always, I’ve learned a tremendous amount from you, Caz. I’ve learned a lot about single-family rentals and the housing market, and how you’re doing it is very interesting. And I really appreciate you being on.
Anthony: I really appreciate the opportunity and the time, Stewart.
Stewart: We’ve only got one question left, and this is the surprise question and we’re going to change it slightly on this one. So I want to take back to your graduation day of college, your undergraduate institution. There you are, bright-eyed, and bushy-tailed after, sure, a very conservative evening the night before. You walk across the stage, you can barely hear your name being read because the crowd’s going crazy, and you get your diploma. And there, at the bottom of the stairs as you walk off the stage, is Anthony today. Right? What do you tell your 21-year-old self? What advice would you give yourself?
Anthony: Be adaptable. Try new things. Be part of growth. Work hard and build relationships.
Stewart: Yeah. I love it.
Anthony: Just some quick tidbits.
Stewart: Yeah, that’s it, right? It’s network. It’s find growth. It’s take risk. I mean, that is really good advice. I have a soft spot in my heart for college students. I was a professor for a number of years, and I think that young professionals really benefit from hearing from people who are at the top of their game in their respective fields. And so I appreciate, and they do too, the wisdom, Caz.
Anthony: I will love the topic, only because it’s near and dear to me, because it’s sort of been my path. Right? I went from sales and trading to investment banking, to an institutionally funded startup, to a Minneapolis-based operating company, now at Man. I have gone from equities sales and trading to commercial real estate, now to residential real estate. And it has been an amazing and fun ride, and all while being kind of part of growth and change. It’s been a fun ride for me.
Stewart: That’s awesome. Caz. Thanks for being on. Anthony Cazazian, managing director, head of Residential Real Estate at Man Group. Thanks for being on.
Anthony: Stewart, thanks so much. Take care.
Stewart: Thanks for listening. If you have ideas for podcast, you can email me at firstname.lastname@example.org. My name is Stewart Foley, and this is the Insurance AUM Journal podcast.