Brookfield Properties is poised for a major expansion in San Francisco's real estate scene, planning to potentially acquire a substantial portion of Veritas Investments' portfolio. This move could double Brookfield's existing residential holdings in the city. The chance for this acquisition comes as Veritas struggles financially, defaulting on significant mortgage obligations. This downturn marks a notable fall for Veritas, once hailed as a paragon of the American dream in the real estate sector.

Everyone loves a rags-to-riches story. In real estate, there are few better than that of Veritas Investment CEO Yat-Pang Au. The son of Chinese immigrants to San Francisco, Au saved up to buy his first 6-unit apartment building in 2003 to convince his then girlfriend, now wife, to move in with him. Not too long after the great recession hit, Au saw a buying opportunity. He called on some of his contacts at Harvard (ok, he wasn't exactly wearing rags before his success, but still) and was able to buy up distressed smaller apartment buildings in the city. By 2017, Veritas was the largest apartment owner in the city and currently has over 7,500 apartment units under management.

Veritas's investment thesis is unique and quite savvy. San Francisco, like many West Coast cities, is comprised of a lot of smaller, mid-rise apartment buildings. So, Veritas Investments has focused its acquisitions on "a frequently overlooked population: residents in small-to-medium sized buildings."

Technology and operating efficiency are also said to be a component of the company's business model. According to the website: "We acquire buildings for our investors that are often overlooked by other operators, establish scalability with a tech-forward vertically integrated operating model, and deliver competitive investment returns through targeted capital improvements that modernize and preserve assets for years to come."

By building a portfolio of "mom-and-pop" apartment buildings, Veritas Investments was able to package these assets in a way that finally made sense to institutional investors. Ivanhoé Cambridge has become one of the firm's largest investors.

Veritas Investments has grown thanks to the booming economy and incredible rent growth the Bay Area has seen over the last decade. But in the last few years, the area, particularly San Francisco, has struggled. The pandemic induced shift to remote and hybrid work hit the city harder than almost any other city in the world. To make matters worse, those ten-year loans that Veritas got in 2012 and 2013 when they had their buying spree are coming due now in a (hopefully short) period of high rates.

The economic situation has forced the company to default on almost a billion dollars worth of mortgages. That mortgage portfolio is now being purchased by Brookfield Properties and a New York-based investor called Ballast. If those companies choose to foreclose on the loans, they would take control of 2,165 apartments, doubling the size of Brookfield’s current San Francisco residential portfolio.

Even if the new lenders do choose to foreclose, there is a future for Veritas. According to a statement, they are "committed as ever to San Francisco, to our residents and our properties, and see tremendous opportunities ahead." San Francisco has had some signs of a recovery, but it still has one of the highest apartment vacancy rates in the nation.

Veritas Investments has been a pioneer in technological advancement, environmental stewardship, and community engagement. It would be a loss for the industry if a forward-thinking company like Veritas Investment failed, but unfortunately, the often harsh real estate reality can come to even the best-intentioned landlords.

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🫖 Another tea party?: Commercial landlords in Boston are petitioning to have their buildings’ tax assessments lowered to more accurately reflect their valuation. If this works, landlords in other cities with similar assessment procedures will likely follow.