A COTTAGE INDUSTRY GOES BIG:
Institutional Investors Flock to Single-Family Homes
The depressed housing market has offered buyers an opportunity: attractive deals. Large investors have responded, buying houses that they intend to place on the rental market. How might their decisions affect the housing sector overall?
Some of the country’s richest, savviest financiers have created a multibillion-dollar industry over the past year and a half. And the Southeast is smack in the middle of it.
Institutional investors, led by private-equity giants Black- stone LLC and Colony Financial Inc., have fire-hosed money into the traditionally mom-and-pop business of buying discounted single-family houses, renovating them, and then renting them out. In the past year, deep-pocketed investors have scooped up tens of thousands of distressed properties, including thousands in Georgia and Florida, before prices rise too much. Just to name a couple of the biggest players, Blackstone has spent more than$4 billion on about 25,000 houses and is still shopping, while Colony has invested more than $1 billion in more than 8,200 properties and, as of March, still had $1 billion set aside to buy another 1,000 homes a month. In May, Colony’s single-family rental subsidiary, Colony American Homes, filed for an initial public offering.
Individual firms’ strategies differ, of course, but the idea behind this new asset class of single-family rentals is straight- forward. Investors are targeting markets with two broad traits: places that suffered abundant foreclosures and the recession-driven decline in home prices, but ones that also offer sound long-term economic prospects. Along with several cities in the West and Southwest, Atlanta and Florida’s metropolitan areas— including
Miami, Orlando, and Tampa—fit that bill, in the view of these investors. Investors are acquiring houses through numerous channels, including foreclosure auctions (see the side- bar) —the source of roughly half of Blackstone’s portfolio—and normal individual purchases, as well as acquiring homes from government-sponsored mortgage enterprises, financial institutions, and other investors.
It’s the old mantra, with a twist: buy low, fix up, rent, and then perhaps sell high.
“We looked at this asset class and said, ‘Gosh, we can buy homes that sold for $300,000-plus for $150,000,’” Jonathan Gray, global head of real estate for Blackstone, said at the Credit Suisse Financial Services Forum held in February 2013 in Miami.
Gray’s firm last year formed a company called Invitation Homes to execute Blackstone’s rental strategy. Blackstone calculates that, given the dearth of new homes built since the housing bust, its venture should work with even modest economic and population
Colony Financial, a publicly traded real estate investment trust established by the private equity firm Colony Capital, is equally enthused about this “new institutional real estate asset
class,” said its CEO, Richard Saltzman, during a March earnings conference call.
The institutionalization of house rentals parallels what happened to the apartment business about 20 years ago. Around the early 1990s, the multifamily real estate business evolved from one dominated by individual landlords with a handful of units to one ruled by institutional players with sprawling apartment complexes all over the country, noted several real estate experts, including Marcus Ridgway, the chief operating officer of Invitation
Homes (see the Q&A on page 12).
Long-range implications are unclear. This emerging rental industry is sufficiently new that its implications for the broader housing market are not clear. Most observers believe investor purchasing has pushed up home values, which have risen nationwide in the past year but remain below pre-recession levels in most markets hit by the housing bust. At the same time, by forcing prices up and the supply of available homes down, the entrance of deep-pocketed buyers has shrunk the supply of homes available to lower-end buyers as well as small-scale landlords, who traditionally have bought foreclosed houses.
Then there are questions about what this trend could mean for communities. Some real estate agents and neighborhood activists worry that bulk home buying will flood neighborhoods with renters and thus make communities less stable. In addition, the
large investors figure to eventually sell their houses for a profit. On top of the rental income, home price appreciation is part of the typical institutional investment strategy, spelled out in the initial public offering documents of a couple of firms. When will they sell, and how will that affect local housing markets?
Many of these medium- and long-term… (Read full article here)