Blackstone Group LP (BX), the biggest buyer of U.S. commercial real estate since prices bottomed, is jumping into residential property as housing recovers.
The private-equity firm has spent more than $250 million this year buying foreclosed single-family houses with the intention of renting them out, said two people with knowledge of the effort. The goal is to acquire enough assets to potentially take public as a real estate investment trust, or sell to another company or even to tenants, said the people, who asked not to be identified because the plans are private.
Blackstone, which has loaded up on strip malls, warehouses and suburban office buildings in the past two years, is turning to residential real estate after a 34 percent plunge in prices since the 2006 peak. The New York-based company is the biggest investor seeking to enter the single-family leasing market as rents climb and the U.S. homeownership rate sits at a 15-year low, joining rivals including KKR & Co. (KKR) and Colony Capital LLC.
“It’s turning into a $10 billion industry,” said Colin Wiel, managing director and co-founder of Waypoint Homes, an Oakland, California-based company that has bought about 1,800 distressed homes for rent with backing from investors including GI Partners and Columbia University. “There’s a lot of competition.”
Blackstone’s real estate group has teamed with principals of Treehouse Group LLC of Tempe, Arizona, and Dallas-based Riverstone Residential Group to buy and fix up the homes, find tenants and maintain the rentals, said the people familiar with its strategy. Riverstone is an apartment-management company founded by brothers Nick and Peter Gould, owners of U.K. property-investment firm Regis Group Plc.
So far, Blackstone has acquired more than 1,500 houses around Phoenix and Southern California, the people said. It plans to buy in markets with the greatest supply of distressed properties, including Florida, Northern California and Georgia.
Peter Rose, a spokesman for Blackstone, declined to comment. Treehouse and Riverstone executives didn’t return phone calls seeking comment.
About 6 million U.S. borrowers will lose their homes in the next five years because of inability to pay their mortgages, creating demand for as many as 4 million new rental households, according to Scott Simon, head of mortgage bonds at Pacific Investment Management Co. (PTTRX) in Newport Beach, California. Tom Shapiro, chairman of GTIS Partners, estimates a $1 trillion market for single-family rentals. His New York-based real estate investment firm expects to invest $1 billion in the area by 2016.
Capitalizing on the distress requires solving a puzzle: how to buy enough homes and manage the properties in a way that’s economical. Bulk sales of repossessed homes by banks and U.S.- owned Fannie Mae have been relatively small. Home seizures are close to a four-year low as lenders are slow to resume processing of foreclosures following a February settlement by the five biggest loan servicers over improper practices, according to Irvine, California-based data firm RealtyTrac Inc.
“While a lot of people are talking about it, very few have actually built significant portfolios and even fewer, if any, have achieved significant economies of scale,” said Stephen Coyle, chief investment officer of Cohen & Steers Global Realty Partners, the private-equity fund unit of the New York-based real estate stock investor. “The people who have made the most money at it are the guys who have, like, 20 houses or so.”
The venture marks Blackstone’s first major foray into the U.S. residential market. The company was the top buyer of commercial real estate in 2010 and 2011, spending about $16.7 billion, according to Real Capital Analytics Inc. in New York. Deals included the $9 billion purchase of more than 500 shopping centers from Centro Properties Group and industrial properties valued at $1 billion from Prologis.
U.S. commercial-property prices have gained about 26 percent from a post-crash low in January 2010, according to an index compiled by Moody’s Investors Service and Real Capital.
In the housing market, price declines are easing. The S&P/Case-Shiller index of values in 20 U.S. cities fell 1.9 percent in April from a year earlier, the slowest pace since 2010.
While mortgage rates are at record lows, rental demand has climbed because many Americans can’t buy homes because of insufficient income or bad credit, or because they prefer the flexibility of renting. Monthly apartment rents in the U.S. have jumped almost 6 percent since the end of 2009, to an average $1,018 in the first quarter, according to Reis Inc.
Blackstone has an advantage over competitors in the housing rental market in terms of readily available capital. The firm is raising $13 billion for what will be the largest-ever private equity real estate fund. Others are using a series of small private funds. KKR is working with Atlanta-based homebuilder Beazer Homes USA Inc. (BZH) to raise money by selling shares for a non-public REIT.
A publicly traded REIT that owns and manages single-family homes would be a new twist on a familiar structure that enables stock investors to take part in the real estate market. The REIT industry has an aggregate market value of about $525 billion, according to the National Association of Real Estate Investment Trusts, a Washington-based trade group.
“REITs could be effective in channeling capital to address the ongoing problems in the single-family housing sector,” said Ron Kuykendall, a spokesman for the group.
Buyers of foreclosed houses face the challenge of managing properties scattered among different neighborhoods and states, compared with managing an apartment building with hundreds of units within one property. Bargain-seeking investors also are finding that home prices have begun to rebound in many markets, making it harder to accumulate homes at deep discounts.
In Phoenix, one of the first markets targeted by investors in single-family rentals, the median price of a single-family house jumped more than 32 percent from May 2011 to May 2012 and the supply of for-sale homes fell by 50 percent, according to a June 27 report by Michael Orr, director of the real estate center at the W.P. Carey School of Business at Arizona State University.
Investors, who bought 28 percent of the homes, often paying all cash, are bidding up prices at the low end of the market, Orr said.
“Most houses below $250,000 priced realistically are attracting large numbers of offers in a short time, and many exceed the asking price,” Orr wrote.
Surging rental demand has pushed up apartment rents and occupancy enough to justify a rebound in new multifamily construction from 2009’s five-decade low. The Bloomberg Apartment REIT Index (BBREAPT) had a 181 percent total return in the three years through June, compared with 137 percent for the broader REIT index and 58 percent for the Standard & Poor’s 500 Index.
“As an asset class, single-family REITs will exist,” Colony Capital Chairman and CEO Tom Barrack told Bloomberg Television on March 20. “What you need is a national brand.”
Barrack is building an in-house staff to realize his plans to acquire $1.5 billion of rental homes by April of next year, Justin Chang, acting president of the firm’s Colony American Homes unit, said in a June 8 interview. The business, based in Scottsdale, Arizona, has acquired more than 1,200 houses and hired 125 people to buy and maintain properties in Arizona, California and Nevada, he said at the time.
Colony American Homes last week purchased about 300 homes in the Houston area for about $30 million. It is in talks to buy more properties in Texas, in markets including Dallas, Austin and San Antonio, Chang said in a statement.
Colony plans to hold the homes it buys. Institutional ownership could provide stability to the housing market, Barrack said in the TV interview.
“If speculators are just buying these homes and trying to flip them, you’re fighting your own market,” he said. “The object is to manage them over time, just like multifamily.”
The KKR venture, Beazer Pre-Owned Rental Homes Inc., had raised $85.3 million as of May 15 through the sale of shares in a private REIT, according to a filing with the Securities and Exchange Commission.
The venture, based in Phoenix, owns almost 200 single- family homes in Phoenix and Las Vegas. It’s led by CEO Patrick Whelan, who was chief operating officer of Archstone, the apartment company that’s owned by the estate of Lehman Brothers Holdings Inc.
Investment yields are coming down as more competitors enter the fast-moving market, said Waypoint’s Wiel. Buyers of single- family homes for rent can achieve yields of about 8 percent excluding debt but that eventually will fall to the about 6 percent return seen by apartment-property investors, he said.
“My prediction is five years from now, the single-family rental industry will look just like the multifamily rental industry,” Wiel said. “Mom and pop owners figured it out a long time ago.”
By Hui-yong Yu and John Gittelsohn
Courtesy of Bloomberg News