Blackstone Crowds Housing Market as Rental Gains SlowingJohn Gittelsohn and Prashant Gopal
Rents for single-family homes are rising slower than property prices as firms such as Blackstone Group LP flood the market with homes for lease, posing risks to investors betting billions on the burgeoning market.
Monthly payments for properties in Phoenix rose 1.3 percent in February from a year earlier, compared with a 25 percent jump in for-sale asking prices, according to Trulia Inc., which operates an online listing service. In Atlanta, asking prices climbed 14 percent as single family rents gained 0.5 percent, and in Las Vegas rents dropped 1.7 percent even as asking prices soared 18 percent.
While private-equity firms are helping real estate values recover from the worst slump since the 1930s by cutting the supply of foreclosures for sale, they’re also crowding the market with rentals. Leases for U.S. apartments rose 3.9 percent in February from a year earlier, more than quadruple the 0.9 percent increase for single-family homes, Trulia said.
“Investors are buying homes, in part, to rent them out, and that has added a lot of rental supply, and that’s preventing rents from rising,” Jed Kolko, San Francisco-based Trulia’s chief economist, said in a telephone interview. “It means some investors will start to think about selling those single-family rentals.”
Blackstone, based in New York and the world’s largest private-equity firm, has spent more than $3.5 billion to buy 20,000 single-family rentals, while Tom Barrack’s Santa Monica, California-based Colony Capital LLC has raised $2.2 billion. They rushed to buy houses after prices fell by a third from their July 2006 peak as more families opted to rent after failing to qualify for a mortgage or deciding not to own.
“Prices have increased off a very low base, and it’s growing increasingly competitive, but we are still finding opportunities to buy,” Devin Peterson, a Blackstone real estate associate overseeing the company’s housing initiative said in a telephone interview from New York. “We recognized that prices were moving faster than people expected. We’d rather be a few weeks behind in completing a rental process than missing out on a few points in home price appreciation.”
The firm last week expanded a credit line led by Deutsche Bank AG to $2.1 billion from $600 million to buy homes.
While large funds accounted for a small fraction of the almost 5 million homes sold last year, their buying spree had an impact on the market, said Kirk McGary, chief executive officer of Real Property Management, a Layton, Utah-based rental company whose franchises in 85 metropolitan areas manage more than $5 billion of single-family homes.
“The institutional people have definitely changed the game,” McGary said in a telephone interview.
Institutional investors in 2012 accounted for 30 percent of sales in Miami, 23 percent in Phoenix, 21 percent in Charlotte and 19 percent in Las Vegas, according to a report today by real estate information service CoreLogic Inc.
“The ripple effects are greatly impacting the broader market,” said the report by Sam Khater, CoreLogic’s deputy chief economist.
Investors flocked to Phoenix after home prices plunged 56 percent from their June 2006 peak to a September 2011 low, according to the S&P/Case-Shiller index of home values. Last year, Phoenix rose the most in the 20-city index, making it harder for investors to find bargains then profit from renting.
Prices paid by the largest buyers probably rose more than the broader market because they’re competing to buy similar homes -- typically three-bedroom houses built since 1990, said Oliver Chang, co-founder and managing director of Sylvan Road Capital LLC, an Atlanta-based single-family rental investor.
“They’re effectively pushing prices up on each other,” Chang, a former Morgan Stanley housing analyst, said in a telephone interview.
The median purchase price for a single-family home in Phoenix jumped 35 percent to $163,000 in January from a year earlier, according to a March 8 report by Center for Real Estate Theory at Arizona State University’s W.P. Carey School of Business. Median rents on a per-square-foot basis, meanwhile, dropped 3 percent in February from a year earlier after climbing 1.5 percent in the 12 months through February 2012 and 3 percent a year earlier, according to Fletcher Wilcox, a real estate analyst at Grand Canyon Title Agency in Phoenix.
Investors seeking deals in other cities also face shrinking yields after a jump in prices. Atlanta resale prices climbed 9.9 percent in the 12 months through December, the city’s biggest gain in Case-Shiller data going back to 1991, and Las Vegas prices jumped 13 percent.
Rents on three-bedroom homes averaged 65 cents a square foot in Atlanta in last year’s fourth quarter, up 1.6 percent from the same period in 2011, while Las Vegas rents fell 4.1 percent to a median 70 cents a square foot over the same timeframe, according to RentRange LLC, a Westminster, Colorado-based single-family rental data provider.
Tina Africk, a Las Vegas broker who manages 60 single-family home rentals, said houses that might have rented in 30 days in the past can now take 60 to 90 days to fill, while rents have dropped about $100 a month from a year ago.
“The individual owners are going to feel the impact much more,” Africk said. “For an institutional investor, $100 here and there doesn’t mean that much.”
In Phoenix, competition among landlords is heating up as the flow of new renters who lost their homes to foreclosure has begun to slow, Wilcox said. Arizona, which has a relatively quick repossession process, has worked through many of its foreclosures, and distressed sales make up a shrinking portion of sales, Wilcox said.
“What we’re seeing is a game of musical chairs,” Wilcox said. “People lose homes to foreclosure and then rent a single-family home from an investor while another investor buys the foreclosure they just left.”
Slowing rents and rising purchase prices come as investment funds turn to public markets to raise capital and investors seek more opportunities to place bets on a housing recovery. Home values rose 6.8 percent last year, the biggest 12-month gain since July 2006, according to Case-Shiller data.
Prices may rise 7 percent this year and more than 14 percent through 2015, according to JPMorgan Chase & Co., as the Federal Reserve buys mortgage bonds to push down borrowing costs, investors seek ways to generate yield, and buyers compete for a dwindling pool of available homes.
American Residential Properties Inc., a single-family rental operator based in Scottsdale, Arizona, plans to file for an initial public offering during the first quarter of this year, “subject to market conditions,” it said in December.
American Homes 4 Rent, headed by Public Storage founder B. Wayne Hughes, said on Feb. 27 that it plans to file for an IPO within 60 days. The Malibu, California-based company is the largest owner of single-family rentals after Blackstone with more than 10,000 homes.
Silver Bay Realty Trust Corp., a Minnetonka, Minnesota-based firm, raised $263 million in December, when it became the first publicly traded real estate investment trust to invest only in single-family rentals. Shares in the company rose 0.5 percent today as of 4:15 p.m. in New York and have gained 4.2 percent since the offering.
The strategy is to reap the long-term benefits of both rising rents and climbing home values, by investing in cities with job and population growth prospects, Silver Bay Chief Executive Officer David Miller said.
“We wouldn’t continue buying homes if we couldn’t get returns that our investors found attractive,” Miller, whose company owns more than 4,000 rental homes, said in a telephone interview. “We agree gross yields have been compressed somewhat, but we still find them attractive.”
Silver Bay, which owns rentals in 10 cities, had a net loss of $3.2 million on revenue of $2.8 million in its most recent quarter, the company reported on Feb. 28. Its gross yields, based on property costs and rents for 1,700 occupied homes, fell 2 percent from the previous quarter, the only comparison available for the company, whose shares began trading on Dec. 17.
Colony doubled the size of its portfolio during the quarter ended Dec. 31, to 5,405 homes, and has since increased the number to 7,000, Richard Saltzman, CEO of Colony Financial Inc., Barrack’s REIT, said on a March 7 earnings call.
Colony declined to comment further, said Owen Blicksilver, a spokesman for the company with Blicksilver Public Relations Inc.
In the fourth quarter, the number of homes Colony owned in Arizona, outside joint ventures, declined 1 percent from the previous quarter to 823 units, according to a regulatory filing.
“Colony came in with a bang and fizzled out once prices went up,” Michael Orr, director of the Center for Real Estate Theory, said in a telephone interview.
Orr estimated that large investors bought 8 percent of the Phoenix-area homes sold last year, peaking in July and August before tapering off as prices rose. Purchases by all investors dropped to almost 32 percent of transactions in January from more than 39 percent a year earlier, he said.
More than 5 million former U.S. owners have lost their properties to foreclosure or in a distressed sale since home prices peaked in 2006, data from RealtyTrac show. Last year, the total number of renter-occupied residences increased 1.1 million, while the number of owner-occupied households fell by 106,000, according to a Commerce Department report.
The apartment market has remained strong even as single-family home rental supply increases, in part, because the properties appeal to different tenants, said Greg Willett, vice president of MPF Research, a Carrollton, Texas-based apartment-data firm. While apartments attract young single people, houses draw in families, he said.
Over the last three decades, rents and home prices increased in parallel at an average annual rate of 3 percent, said Jade Rahmani, an analyst with Keefe Bruyette & Woods Inc. That may change temporarily as investors pour money into rentals.
“One of the risks is prices run up and therefore the rental economics don’t justify the business model,” Rahmani, who has an outperform rating on Silver Bay and Colony, the equivalent of a buy recommendation, said in a telephone interview from New York. “The problem could be that you would have assets that are up a lot in value, which isn’t the worst thing in the world. The risk would be that everybody goes to sell at the same time.”
That hasn’t happened yet, according to Orr. The supply of for-sale homes has changed little in Phoenix since February 2012, he wrote in a March 8 report. What’s changed are the increased number of homes listed for more than $150,000, along with a 38 percent decline in listings of bank-owned homes and short sales, where the asking price is below the amount owed.
Added supply would be good for Phoenix, said Lawrence Yun, chief economist at the National Association of Realtors.
“It would be a welcome thing because, in Phoenix, they just don’t have inventory,” Yun said in a telephone interview.
Monthly leases in Phoenix’s west side, where investors bought the most rentals, fell by about $100 a month, or 10 percent, in 2012, said James Breitenstein, CEO of Landsmith, a San Francisco-based single-family rental firm that sold most of its 250 Phoenix rental houses last year. Rents also softened in Las Vegas and in Atlanta, where Landsmith acquired about 300 homes in the past six months, he said.
“All the major funds are piling into Atlanta,” said Breitenstein, who has been buying single-family rentals since 2008 and now aggregates small portfolios that he resells to large investors. “There’s a whole bunch of rental supply that’s coming on that used to be sitting empty in bank portfolios.”
There’s more to come. About half of Silver Bay’s homes weren’t leased yet as the company took time to evict residents, renovate properties and find new tenants, CEO Miller said. Colony’s occupancy rate was 53 percent “because acquisition pace has exceeded our leasing rate over the past few months,” Saltzman said during the earnings call.
Eric Gutshall, president of Haven Realty Capital, an El Segundo, California-based single-family investor backed with capital from Leon Black’s Apollo Global Management LLC, said the major buyers of single-family rentals are concentrating on acquiring properties and filling them with tenants.
“The first step is to focus on stabilization,” Gutshall, whose company manages about 1,000 homes in California, Nevada and Illinois, said in a telephone interview. “The next phase is to focus on growing rents.”
For now, Phoenix landlords are lowering rents to fill units, said Cathy Svoboda, a leasing agent with Renters Warehouse, a property management and tenant placement company in Phoenix. Investors are competing with so-called reluctant landlords who are leasing their homes because they can’t afford the loan payments and have moved somewhere cheaper, she said.
“There are a lot of properties out there, so the competition to get your property rented is fierce,” Svoboda said. “Tenants are very savvy. If you’re overpriced by $25, they’ll let you know and go to another one around the corner.”