Private Equity's Real-Estate Empire

By | Updated Jan 3, 2017 7:33 PM UTC

After the housing bubble popped, millions of Americans lost their homes as property values plunged. Many saw this as a tragedy. Some big investors saw it as an opportunity. Private-equity firms led by Blackstone quickly bought tens of thousands of homes at deep discounts, most of them out of foreclosure. They converted the properties into single-family rentals, taking advantage of another opportunity — the ready market for rentals among the many Americans no longer able to buy homes because of the recession or tighter mortgage rules. Real estate investment trusts, private-equity firms and hedge funds have spent at least $25 billion purchasing more than 150,000 houses since 2012, by one count. This flood of money has upended a rental industry traditionally dominated by mom-and-pop owners, and introduced institutional investors around the world to an untapped asset class. Blackstone went on to invent a new version of the money machine that fed the homeownership bubble. Communities across the U.S., still recovering from a housing crisis fueled by Wall Street speculation, were left to assess how they’ll fare with out-of-town money managers as their most powerful landlords.

The Situation

In the first quarter of 2016, the nation’s homeownership rate was  63.5 percent; in 2015 it had hit 63.4 percent, its lowest level since 1967. The number of renter-occupied units had increased by about 5 million since 2011. Most landlords of single-family homes only own a few units. But the entry of big investors, both as purchasers and as lenders, has had a big impact on the market. Blackstone, BlackRock and Colony Capital all now offer financing to smaller landlords looking to expand their holdings. Two years earlier, Blackstone had fueled its own vast purchases by pioneering a new kind of bond in which investors are paid out of rental streams — a variation on the mortgage-backed securities that made so much money for Wall Street before blowing up. Moody’s rated the biggest portion of Blackstone’s first bond AAA and the firm was able to borrow $479 million at 1.9 percent, less than half the typical 30-year mortgage rate. The money covered most of what the company had spent buying and fixing up the houses, which had already risen 18 percent in value. In 2016, the big players in the field were consolidating their holdings; Blackstone began offering to sell some of its homes to tenants. But a Federal Reserve report found that institutional landlords filed eviction notices in Atlanta at much higher rates than mom-and-pop owners.

Source: Deutsche Bank Securities


The Background

Blackstone built its rental-home business with an advantage few if any other buyers could match: billions of dollars in credit from large banks. Its Invitation Homes subsidiary quickly became the largest single-family home landlord in the U.S., with 50,000 properties. Altogether, hedge funds, private-equity firms and real estate investment trusts have raised about $20 billion to purchase as many as 200,000 homes to rent. The buying — often by employees who brought stacks of certified checks to foreclosure auctions on courthouse steps — helped turned down-and-out markets such as Arizona, California, Florida and Georgia into booming ones as the firms outbid local investors and drained markets of foreclosures. As bargains disappeared from one place, the firms rapidly moved on to the next. The impact of their purchases was magnified by the fact that the firms often target the same sorts of properties in the same neighborhoods.

Source: U.S. Census Bureau, data compiled by Bloomberg

The Argument

The firms clearly played a role in lifting property values, and in many cases they are removing blight by fixing damaged, vacant houses and filling them with tenants. But individuals and smaller investors complain that these outsiders paying cash have sucked up the best bargains. And while the firms have hired thousands of workers to maintain the properties, they face a bigger logistical challenge than the owner of an apartment complex, and some tenants report poor service. Housing advocates have called for federal intervention: They complain that lower-income home buyers are being shut out of the market, worry that the need for big profits will push up rents and are skeptical that the return of the real estate money machine will end well. “The last time Wall Street devised a plan to make mountains of money off our homes it ended catastrophically,” the Atlanta branch of the American Friends Service Committee said on its blog after a protest at a foreclosure auction that was dominated by private-equity bidders. Economists at the Federal Reserve have noted the same potential for danger.


The Reference Shelf

  • “The Big Rent,” a series of Bloomberg News articles
  • Bloomberg Visual Data charts examine private equity’s impact on the Greater Phoenix rental market and Blackstone’s funding strategy.
  • A Federal Reserve paper in December examined the rise of business investors in the rental-home market.
  • A Fannie Mae report examining the rapid growth of single-family rentals.
  • A Census Bureau survey found rental vacancies down and rents up between 2009 and 2011.
  • The Center for Housing Policy’s review of research into the rental market.

First published Dec. 23, 2013

To contact the writer of this QuickTake:
Prashant Gopal in Boston at

To contact the editor responsible for this QuickTake:
John O'Neil at