Chicago’s 727 West Madison tower — a luxury residential building with poolside cabanas and a yoga studio — sports a new owner these days: the billionaire founder of the Zara clothing chain.
Amancio Ortega snapped up the building in Chicago’s West Loop neighborhood last month for $232 million, joining a growing number of the super-wealthy betting on U.S. renters.
Over the past decade, ultra-wealthy individuals and their firms have more than doubled their investments in apartments, largely in the sector known in the U.S. as multifamily housing, according to research from Knight Frank.
Today, many of those investors are betting that they can snag a deal, as apartment building prices have fallen amid the recent commercial property downturn. At the same time, a broad housing shortage bodes well for rents in major cities over the long term.
“This is a sector set for growth,” said Liam Bailey, Knight Frank’s global head of research. “If you have deep pockets and you can get in the market, it’s a really interesting time.”
Earlier this year, a real estate firm led by Israeli billionaire Eyal Ofer bought a 57-unit apartment building just steps from Manhattan’s Gramercy Park. One of Latin America’s richest families is hunting for deals to buy multifamily buildings as they seek to break into U.S. real estate.
In late 2022, an investment firm backed by Carlyle Group Inc. co-founder David Rubenstein raised money from wealthy investors globally to buy apartment buildings as well as logistics properties.
Before the pandemic, the world’s rich were largely focused on office properties, where a trophy building with long-term leases could provide stable income. But now, with the rise of remote work and soaring office vacancies, rental housing has become more of a draw.
A commercial property slowdown is also shaking up competition in the space. Many institutional players have been holding off on new deals due to the surge in borrowing costs and falling values. In total, global commercial property investment volume in the second quarter was down 57% from a year earlier to $142 billion, according to a report from the brokerage CBRE Group Inc.
That’s left an attractive gap for wealthy investors who can be less vulnerable to the vagaries of the debt market and have a longer-term investment horizon. Such investors can often pay with cash or have deeper relationships with banking institutions to secure financing.
While apartments were the most popular property type for investors in the second quarter, transactions were down 66% from a year earlier, according to CBRE. Still, the brokerage said the sector is poised to benefit in coming quarters.
“Fundamentals have stabilized and renter demand was strong in Q2 despite fears of an economic slowdown,” CBRE said in the report.
While rents have been easing slightly in the U.S., housing demand has fueled massive increases over the past few years, with median rent gaining nearly 18% in 2021 and 3.5% in 2022, according to data from Apartment List.
Many cities elsewhere in North America and across Europe and Asia are also grappling with a supply crunch that’s pushed up prices for tenants.
“COVID highlighted to everyone that the home is one of the few things you can’t deal without,” said Richard Valentine-Selsey, head of European living research at the brokerage Savills. “You can do remote working and get your shopping online, but you need somewhere to live.”
Apartment buildings are also much cheaper now. A surge in borrowing costs since early 2022 has pressured values and slowed dealmaking. In the U.S., prices have fallen 16% in August from a year earlier, according to the real estate research firm Green Street.
Ortega, 87, is an example of how billionaires’ real estate appetites are changing.
Spain’s richest man has often focused on offices to diversify his fortune away from Zara owner Inditex SA. His property purchases now make him a landlord for companies including Rio Tinto PLC, Apple Inc. and Amazon.com Inc.
While he continues to buy office buildings through his personal investment firm, Pontegadea, the family office acquired New York’s 19 Dutch apartment building for about $500 million last year.
Ortega has a net worth of $75.6 billion, with more than 10% of it now tied up in real estate, according to the Bloomberg Billionaires Index. A representative for Pontegadea declined to comment.
Real estate has long been a popular asset for many of the world’s rich, partly because it typically offers stable cash flows and the potential for certain tax breaks. Family offices allocated about 13% to real estate in 2022, according to a survey of 230 investment firms by UBS Group AG. More than a third of the firms said they plan to allocate more to the sector in the next five years.
“They’re buying multifamily assets at good locations at an attractive return rate,” said Ran Eliasaf, founder of the investment firm Northwind Group. “The price they’re buying at is also an attractive return relative to what it was three, four years ago, and they’ll probably see rent increase over time because of the supply shortage.”
Bets on apartments aren’t without risks. Apartment leases are often shorter than those signed by office tenants, meaning landlords might have to deal with more turnover.
Overseeing an apartment building also comes with maintenance concerns and the practicalities of dealing with tenant questions and turnover. Buying larger, or more, buildings can help mitigate that cost.
“If you have a few units, your risk is higher,” said Knight Frank’s Bailey. “If you’re doing it at scale with 50-plus apartments, you’re also more likely to have someone taking away the headache of managing the units.”
While the U.S. is set to keep attracting the most rental-housing deals, other countries are starting to catch up. Australia is encouraging investors to build rental properties to help ease the country’s housing crisis, while the multifamily sector, called build-to-rent in certain countries, is picking up in the UK and other parts of Europe. For billionaires betting on the space, that means more opportunities may crop up.
For now, the decline in U.S. apartment prices is making it an opportune time for billionaires to nab some deals.
“If you’re a long-term real estate investor, this is an excellent time to be looking to deploy capital,” said Ronald Dickerman, founder and president of Madison International Realty. “There is a cyclical buying opportunity.”