Blackstone Group LP (BX), the biggest U.S. landlord of single-family houses, is carving out a new company to own apartment real estate, betting demand will outpace supply for at least three more years.
Blackstone is hunting for acquisitions to expand LivCor, a Chicago-based company formed last year from the purchase of stakes in 71 apartment properties valued at $2.4 billion. The firm is concentrating on suburban areas where there’s not as much new construction, including in the Southeast and in Texas, where more than half of the roughly 26,000 units it acquired are located, said Nadeem Meghji, who is overseeing the business.
“There is still a shortage of overall housing supply in the U.S.,” Meghji, a managing director at New York-based Blackstone, said in a telephone interview.
A stampede by investors into U.S. rental housing as the homebuying market collapsed in 2006 is still going strong in cities including San Francisco, Seattle and Houston, boosting rents and driving construction of apartments in and near downtowns. For Blackstone -- which has bought about 45,000 houses in the past three years to lead the burgeoning industry for single-family rentals -- LivCor represents its first major foray into the multifamily market.
U.S. apartment rents have climbed 13 percent on average since the recession ended in 2009, according to Reis Inc., a New York-based commercial-property research firm. Newer buildings charging higher rates helped push up the average, as developers look to cover their costs and modern amenities lure high-wage workers such as programmers and oil-industry engineers.
The population of 20 to 34-year-olds, people in their prime renting years, exceeded 64 million as of the latest Census Bureau estimate for 2012. That represents about one-fifth of the U.S. population.
“When you look at the demand trends, there’s a good reason to be optimistic over the next certainly three to five years, and likely beyond,” said Jay Parsons, director of analytics at property specialist MPF Research, a unit of Carrollton, Texas-based RealPage Inc. “The cycle still has some legs.”
A surge in construction of multifamily dwellings in April propelled U.S. housing starts to the highest level in five months, the Commerce Department reported last week. Apartment and condominium projects jumped almost 40 percent from March, compared with a 0.8 percent increase for single-family homes.
Construction remains low by historical standards. Completions in buildings with five or more apartments averaged about 155,000 new units per year from 2010 to 2013, according to the U.S. Census Bureau. That’s below the annual average of about 245,000 units since 1999, according to the agency.
Effective rents, or what tenants paid after any landlord breaks, averaged $1,090 a month in the first quarter, the highest since Reis began keeping the records in 1999. The U.S. apartment-vacancy rate has been hovering around 4 percent, its lowest since 2001, for more than a year.
As development accelerates in urban centers, some investors such as Blackstone are looking farther afield to areas with higher potential for rent gains.
“A lot of what’s getting built is urban mid- and high-rise product,” Meghji said. “There are fewer suburban, garden-style four-story walkups being built in most of our markets because suburban rental rates are not high enough to justify new construction.”
Blackstone is buying older apartments and fixing them up to compete with newer units -- improvements such as upgrading the kitchens and bathrooms, swapping carpets for wood floors and changing the lighting.
Housing demand also has yet to fully rebound. Annual household growth approached 1 million in 2012 for the first time since the Great Recession, according to Harvard University’s Joint Center for Housing Studies’ most recent annual report on U.S. housing. Household formation slowed since 2007 as many people got roommates or moved in with parents.
“Pent-up demand is going to result in more than 1 million households being formed annually the next several years,” Meghji said. “We should have more demand than total housing supply for the next three years.”
For landlords, that increased demand may not be enough to counter the rise in apartment construction and tempered rent growth. Reis estimates that the U.S. apartment-vacancy rate will hold steady or even increase this year, the first time since 2009 it hasn’t declined.
“It’s not the demand side I worry about,” said Ryan Severino, senior economist at Reis, which tracks almost 10 million apartments in 79 major metropolitan areas in the U.S. “It’s the fact that supply growth is just ramping up. We are four years into a recovery and that has to slow down.”
Suburban markets with high incomes may offer good returns for investors in the next stage of the apartment cycle, MPF’s Parsons said. The “vast majority” of the millennial generation, people born from the early 1980s to the early 2000s, don’t live in urban areas, he said.
“They don’t all want a luxury high-rise with bamboo floors, low-flow faucets and rooftop dog parks,” Parsons said. “The first wave that goes into the suburbs could do very well.”
Smaller cities led the roster of most-affordable apartment markets in the U.S. at the end of last year, led by Columbus, Ohio; Indianapolis; Oklahoma City; Las Vegas; and Raleigh, North Carolina. Each had a rent-to-income ratio averaging 17 percent, meaning 17 percent of annual income went to pay rent, according to Axiometrics Inc., a Dallas-based research company.
That’s about half the maximum of one-third of gross income that’s typically required to qualify for a home mortgage.
New York, which has long been an outlier, is the least affordable market, followed by Los Angeles, Miami, San Francisco, Boston and San Diego, according to Axiometrics. Excluding New York, those cities averaged 33 percent in rent-to-income ratios, while the U.S. as a whole averaged 24 percent, according to the firm.
Blackstone likes Texas markets because of strong job growth, Meghji said. Toyota Motor Corp. said last month it plans to open a new U.S. headquarters in the Dallas suburb of Plano, sending 4,000 jobs from other states. Dallas, Austin and Houston are among the markets with large technology, energy and financial-services employers that have seen some of the fastest growth in apartment rents in the U.S.
Effective apartment rents in the submarket that includes Plano will rise an estimated 4.4 percent in 2016 when Toyota’s new U.S. headquarters is scheduled to open, up from a previous forecast for 3.5 percent growth, Axiometrics said. The Plano submarket, which has had 95 percent apartment occupancy since 2010, saw rent growth of 4.1 percent in 2013.
Blackstone acquired the assets that form the bulk of LivCor from a unit of General Electric Co., which is paring real estate holdings. The firm took over GE’s partnership agreements with eight operating partners.
LivCor also oversees about 3,000 apartments that Blackstone bought in 2012 from Nationwide Insurance with a partner. About half of those homes are in the Pittsburgh area, where drilling in the Marcellus shale has been a boon to the local economy.
Blackstone’s operating partners both manage the LivCor properties and help find new deals, Meghji said.
The formation of LivCor is another step in the exponential growth of Blackstone’s real estate business in the past decade. The firm is the biggest manager of private-equity property funds, with $81.3 billion under management as of March 31. That’s more than triple its holdings at the end of 2007.
The company’s most recent acquisitions include an agreement last week to purchase the Cosmopolitan resort in Las Vegas for $1.73 billion, its first major casino investment. It’s also buying a group of shopping centers from American Realty Capital Properties Inc. (ARCP) in a $1.98 billion deal announced yesterday.
Since the financial crisis, Blackstone has formed a warehouse-property landlord, IndCor Properties, and a company to own shopping centers, Brixmor Property Group Inc. (BRX), by taking advantage of opportunities to buy assets at discounts from distressed sellers.
In single-family housing, Blackstone has spent about $8.6 billion to acquire assets and created a company called Invitation Homes to oversee the house rentals.
“You’re probably a little behind the curve if you’re getting in the game right now,” Reis’s Severino said of apartment investing. “There are still opportunities out there if you pick your spots and be careful about the amount you’re willing to pay.”
To contact the editors responsible for this story: Kara Wetzel at firstname.lastname@example.org Rob Urban