Fortress Bought 40 Buildings the Tape Had Written Off

Fortress Investment Group holds more than 40 apartment buildings in San Francisco, a position Eli Edwards says the firm built at roughly half of pre-COVID pricing while the rest of the market was writing the city off. That entry is now complete; what remains open is whether anyone else will pay for the recovery the same way Fortress did. Edwards, who heads U.S. real estate equity for Fortress and lives in Menlo Park close enough to check the national story against what he could see, told Commercial Observer: "The whole world thought San Francisco was dying. People were calling it a doom loop, or the next Detroit. But I live here in the Bay Area, and I did not see that happening on the ground."

The trade he describes is narrower than a bet on San Francisco, and more useful for it. Edwards dates the conviction to roughly three years ago, when a few troubled submarkets were pressed into service as proof of the entire city's fate while the neighborhoods where residents actually live, in his telling, looked nothing like what a national audience saw on the news. Fortress invested into rent growth that was already showing up in the city's better neighborhoods, he said, in contrast to markets like Texas, where cap rates sat lower and rents were not rising on the ground. "We have to figure out themes that have short-term headwinds but also long-term tailwinds," he said. "That's the hardest part of investing."

Apartment pricing is set block by block rather than metro by metro, and capital that underwrites a market without reading its corner-level supply tends to overpay in lease-up. Fortress put that thesis to work with a 50 percent discount and more than 40 assets attached, a dislocation that lived in the coverage of a market at least as much as in the market itself. What Edwards's account does not lean on is supply, the variable this publication treats as decisive in lease-up; his case rests on the spread between a city's reputation and its rent roll — narrower, and so far the one that paid.

Most of his peers went into the same mess through a different door: large note sales were available, Edwards said, and some firms have done very well in them, but Fortress chose not to pursue those. The pass carries weight from an executive who began his career working out defaulted commercial mortgage-backed securities loans at Bank of America before moving to the real estate investment banking group at Barclays, a résumé that suggests he understands how the paper prices in a workout. That points to a relative-value call rather than a gap in capability, and it likely rested on a plain comparison: at the entry prices available, the buildings were the better claim on the recovery, particularly if the refinancing wall keeps resolving through extensions and modifications rather than paydowns.

The platform behind the call cuts in both directions. Fortress was founded in 1998, manages $55 billion today, and has invested more than $200 billion on behalf of more than 1,600 institutional investors and wealthy individuals over its life, by Edwards's account; PRED's records list $87.3 billion in regulatory assets for the Fortress advisory entity as of Sept. 12 and 1,004 employees, a measure the interview does not reconcile with the $55 billion total. The same records log a deal announcement at the firm on June 30 sized at $1 billion and another on Sept. 3, which is to say an institution still printing large deals while the head of its real estate equity business makes the case for small, unglamorous ones.

Small has been the pattern in the firm's recent real estate equity activity, and David Hammerman, who sat for the same interview, argued in these pages last month that reset values reward investors who can outlast a fund's mandate — private capital held through a repricing rather than sold into it. Fortress's second 1031 bet on student housing, a 600-bed community in Greensboro, carries the same shape at a smaller scale: ordinary assets, bought a building at a time, held by capital with no annual clock to beat.

For allocators sorting through the apartment repricing, the instructive part is where the mispricing sat, because the block-level bid has been the crowded end of this market — portfolios, take-privates, recapitalizations — and the interview points somewhere else entirely, at single buildings in a city whose problems were systematic in the reporting and submarket-specific on the ground. That is a strategy that scales awkwardly, which may be precisely why the discount survived long enough for Fortress to buy it.

The entry price is the easy half of the story, and by now possibly the crowded one, because Fortress bought when the bid for San Francisco apartments was thin, made up of note buyers, workout desks and a few locals with conviction. Owning 40-plus scattered buildings into an exit requires a wider pool that will underwrite occupied, cash-flowing, dispersed multifamily above a pandemic-era basis, and that pool materializes only once the city's reputation has recovered in the places capital can see. The discount was created by a misread narrative; the exit will be priced by whoever agrees the narrative has changed. Those are not the same buyer, and the coverage offers no evidence the second one has arrived.

The interview leaves open whether the position is finished: Edwards describes the purchases in the past tense, and nothing in the account says Fortress is still adding in the city, which is the difference between a completed trade and a campaign that has yet to meet a competitive bid. The number that settles it will not be another acquisition but the first sale of one of those buildings to a buyer who never called San Francisco a doom loop.