In another sign that the “Dead Cat Bounce” for the Real Estate market is now over, Blackstone Group has announced that it’s real estate acquisition pace has slowed 70% from last years pace due to higher prices. In fact, this is the trend seen across the industry. Investors, hedge funds, institutions are all slowing down their real estate acquisitions to the tune of 70-90%.
“The institutional wave has passed,” Gray, who oversees almost $80 billion in property investments, said in a telephone interview. “It’s at a much lower level than it was 12 or 24 months ago.”
What happens next?
Easy. The real estate market might hover here for some time. Not too long thought. As soon the Bear Market of 2014-2017 hits and the US falls back into a severe recession, you will see housing going down once again. Once investors realize where we are in the real estate cyclical composition (dead cat bounce and not expansion) you will see the likes of Blackstone trying to get rid of their properties as fast as possible. With investors heading for the doors, mass volume of real estate should hit the market. Collapsing existing values just as fast, if not faster, than their initial ascend between 2010-2014.
Good luck selling your 43,000 rental properties Blackstone.
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What Happens When Blackstone Starts Dumping Real Estate At Market? Google
Blackstone Group LP (BX) is slowing its purchases of houses to rent amid soaring prices after a buying binge made it the biggest U.S. single-family home landlord.
Blackstone’s acquisition pace has declined 70 percent from its peak last year, when the private equity firm was spending more than $100 million a week on properties, said Jonathan Gray, global head of real estate for the New York-based firm. After investing $8 billion since April 2012 to buy 43,000 homes in 14 cities, the company has narrowed most of its purchasing to Seattle, Atlanta, Miami, Orlando and Tampa.
“The institutional wave has passed,” Gray, who oversees almost $80 billion in property investments, said in a telephone interview. “It’s at a much lower level than it was 12 or 24 months ago.”
Private-equity firms, hedge funds, real estate investment trusts and other institutional investors have spent more than $20 billion to buy as many as 200,000 rental homes in the last two years. They snapped up properties after prices fell as much as 35 percent from the 2006 peak and rental demand rose from the almost 5 millionowners who went through foreclosure since 2008. PresidentBarack Obama credited the investors for helping put a floor under the plunging housing market and consumer advocates such as the National Community Reinvestment Coalition later blamed them for soaring prices in some cities.
Blackstone Group LP Global head of real estate Jonathan Gray said, “The institutional… Read More
Foreclosures Fall
American Homes 4 Rent and Colony American Homes, the second- and third-largest single-family landlords, also have been scaling back as bargains dry up. Home prices have risen 24 percent since a post-bubble low in March 2012, which was about when corporate buyers started their buying spree, according to the S&P/Case-Shiller index. The rate of U.S. foreclosure startsfell to its lowest level in eight years in the fourth quarter as higher prices allowed more delinquent homeowners to sell without taking a loss, according to the Mortgage Bankers Association.
Jade Rahmani, an analyst for Keefe, Bruyette & Woods Inc., said large investors are focusing on fewer locations as they gain experience and prices go up.
“Home prices have increased, which narrows the acquisition opportunity,” Rahmani said. “In addition, these companies have done this for a certain amount of time and there are lessons learned.”
While institutional purchases nationwide fell to a 22-month low in January, corporate investors were more active in the Atlanta region, buying 25 percent of homes sold, according to data firm RealtyTrac. That helped drive up Atlanta prices 37 percent since the March 2012 trough.
Outbidding Homebuyers
Last week, a group of 80 tenant and neighborhood advocacy organizations, including the National Community Reinvestment Coalition and the National Consumer Law Center, asked federal regulators “to address first-time homebuyers being outbid, tenants being displaced, and neighborhoods undergoing dramatic changes as private equity and investor cash continues flooding into local housing markets.”
Gray, 44, said the influence of corporate investors on home prices has been exaggerated. They represent at most 10 percent of the 2 million homes bought by investors in the last two years, according to Rahmani, the analyst.
“There’s a narrative out there that institutional buyers are driving the market,” Gray said. “But the reality is that institutional buyers are in a relatively limited number of markets, their buying is tapering and yet home prices continue to go up at a pretty strong clip nationally — even in markets where institutional buyers haven’t purchased a single home.”
American Homes
At the height of its activity, Blackstone’s Invitation Homes LP made purchases that may have comprised as much as 6 percent of sales for several months in one or more of its 14 markets, Gray said. This may have had a short-term impact on prices, he added.
“We definitely helped alleviate excess distressed housing stock,” he said. “We weren’t 5 or 6 percent for a sustainable period of time in any market.”
After collecting more than 21,000 homes in 42 markets, American Homes 4 Rent (AMH) has slowed its buying in some locations, chief executive officer David Singelyn said at a March 5 investor conference in Florida. The benefit of being in 22 states is that the Agoura Hills, California-based company has the ability to move within many locations and “buy as the opportunities ebb and flow,” Singelyn said.
Colony Financial Inc. (CLNY), a REIT that invests in Colony American Homes, slowed its funding for acquisitions last year to focus on improving operations, CEO Richard Saltzman said in a November conference call. Colony Financial has been gradually allocating less to the landlord business and capped its investment at $550 million for the quarter ending Dec. 31, Saltzman said last month.
Slowing Purchases
Colony American, which owns 16,000 homes, declined to comment, according to Owen Blicksilver, an outside spokesman for the Scottsdale, Arizona-based landlord. American Homes 4 Rent Chief Financial Officer Peter Nelson didn’t reply to a phone message seeking comment.
American Residential Properties Inc., a landlord with 6,000 homes, slowed acquisitions by almost half in its latest quarter ending Dec. 31. It invested $104 million in 633 homes compared with $204 million on 1,251 homes in the previous quarter, the Scottsdale, Arizona-based company said in a statement.
“We intend to maintain the pace of our acquisition activity at roughly the same rate we had in the fourth quarter,” CEO Stephen Schmitz said in an earnings conference call yesterday.
Ramping Up
Some corporate rental companies are still focused on growth.
“We’ve been ramping up acquisitions,” David Miller, CEO of Silver Bay Realty Trust, which owned 5,642 homes as of Dec. 31, said in a conference call with investors last week.
“Looking ahead, we plan to acquire in Florida and Texas while opportunistically adding properties to our Atlanta market and perhaps other markets as well.”
While their acquisitions slow, Blackstone and Colony are extending their reach into the rental business by offering financing to smaller landlords. Last month, Blackstone’s B2R Finance LP originated its first loan for $5.7 million and Colony formed a joint-venture with plans to originate $1 billion in landlord financing this year.
Both companies plan to package the loans as mortgage-backed securities, similar to Blackstone’s $479 million bond issue in October, the first securitization of single-family rental properties.
Long Haul
That’s concerning to U.S. Representative Mark Takano, a Democrat from California. This month he called for the Consumer Financial Protection Bureau, the Department of Housing and Urban Development, the Securities and Exchange Commission and the Treasury to report on the possible risks of “the recent increase of investor owned rental properties and the development of single-family rental-backed securities.”
Institutional investors are not going away even though their size will remain a modest part of the market, Gray said.
“We’re not selling the homes. We’re building a long-term business,” he said.
You are in desperate need of an editor; someone able to save you from appearing to be yet another functional illiterate not to be taken seriously. Seriously.
Thank you for your comment. If you are talking about the title AT is an investment term. Otherwise, yes, you will find some errors. I put out more work in one day than you do in 1 week and you are always free to read well “edited” CNN or CNBC. I will continue to be a wealthy illiterate.
Your writing is actually very readable and conveys great infor.
Thank you Dave
Sell, Mortimer, SELL.
Thank you for your comment.
I don’t understand the logic of this article. Falling real estate prices by themselves can’t force sales by a landlord. If some evidence could be presented to show that Blackstone’s financial situation was such that it could be forced to sell properties, then that would support the argument. There is no suggestion in the article that rents will fall, or that more rental properties will become vacant. People still have to live somewhere.
“Ascend” is a verb. “It’s” is short for “it is”. I think there is a connection between loose logic and loose grammar. I would prefer a few high quality articles to a large number of mediocre ones. I am glad you are wealthy, but sorry for you if you think that being rich makes you a better person than someone else.
Hi Frank,
Thank you for your comment. The logic is very simple. Blackstone is a huge hedge fund. They speculate in stocks and have no business owning real estate. Typically, when the market moves fast against “stock” position they can get out fast. Not so with real estate. Still, when the housing market begins to decline Blackstone will not hesitate to dump all of their properties within a very short time frame.
This doesn’t logically follow. In past real estate cycles, investors have picked up rentable properties at cheap prices which turn a nice ROI and held them for that benefit. That bigger investment groups can realize higher returns on investment doesn’t mean they will like that ROI less if market values drop. It’s the difference between being a speculator (on price) vs. an investor (for income production).
Apart from restrictions owing to portfolio balancing (when “enough is enough”), rising prices erode ROI for additional purchase, so investors don’t continue to invest. They slow down or stop. Of course. But that in no way impies they will turn to selling simply because SOMEBODY ELSE is now paying higher prices for comparable properties already owned by investors who bought theirs cheap.
Hi Bud,
Great point and I agree with you. The reason my post is somewhat “incomplete” is because it’s a follow up on a series of posts I have made on real estate and Blackstone. My assumption was that my regular readers can follow the thought process. In short, I didn’t anticipate so many “new” views. Now, the point I was trying to make is that Blackstone and other hedge funds (who’s primary line of business is to speculate in highly liquid financial markets) have no business owning illiquid real estate. And that’s my main point. I don’t think hedge funds got into this to become REIT. They got in for capital appreciation first, yield second. Now, as I indicated in my other real estate report https://www.investwithalex.com/real-estate-collapse-2-0-why-how-when/ I expect real estate prices to come down significantly over the next few years. Now, do you think Blackstone will be happy collecting their 5-10% yield while they risk losing billions in principal? I don’t know, I am not Blackstone nor do I make their investment decisions. This is almost identical to holding a tanking bond to maturity. Blackstone is very good. If I had to bet, they are already liquidating their real estate holdings.
Very likely they are dumping any properties which are least productive. That’s winnowing, however, not divesting.
Perhaps the important point to consider is whether Blackstone have investment alternatives which are relatively risk free. Are Blackstone really smarter to buy expensive stocks or cheap houses?
Moreover, if they are playing the long game with an investment ROI which offers a good risk/reward proposition, the risk alone (of property prices going down, perhaps only for a period of time) becomes relevant only if they actually sell into that down market. The delay time is so great that by the time the house is actually sold, the market could be back on the rise again. Certainly the smart kids in the back room understood that when they gave the “buy” signal for real estate.
If Blackstone simply hold (acting as investors), all they care about is whether the capital invested (borrowed at ZIRP rates) continues to show a total in-pocket return better than other alternatives of equal or less risk. Their balance sheet isn’t dependent on changes of market price for houses. It’s dependent on how much they invested vs. the liability of debt financed with virtually free money from the FED.
Their profit and loss statement is not dependent on house prices, either. It’s dependent only on their investment rate of return measured by net income after taxes.
Recall also that depreciation expense — a gimme cash-flow item which stocks and bonds don’t offer — can dramatically lower net adjusted income for taxes. And carrying cost of the borrowed money is also tax-deductable.
In the end, profit is what you get to put in your pocket. I’m not sure the high-flying DOW is today relatively less risky than a rentable house bought dirt cheap (when both assets will be financed by the same virtually-free money). After all, the DOW — like house prices — can go down as well as up. 😉
Hi Bud,
Great points and I agree with your analysis. At the end of the day only Blackstone knows what they are going to do. My main point is that Blackstone shouldn’t be in business of holding actual real estate. It has never been done on such a scale and no one really knows how it’s going to play out. Well, simply put the FED is artificially levitating the real estate market directly (through interest rates) and indirectly (through Blackstone, Citi, Wells, etc…and hundreds of thousands off balance sheet properties). If all of that inventory hits the market, its at least a 50% haircut in real estate values.
They own 43,000 properties. Again, I am not sure what their decision making process is, but there is nothing to stop them from getting out of the market. For example, if their analysis shows that Real Estate market will tank 50% over the next 3-5 years most of the things you mention (taxes, yield, zero interest money, etc…) go out the window. They will see it differently. They will see it as an opportunity to make money. First on the short side and then by buying 43,000 properties again. If their analysis shows that, I don’t think they will sit there and do nothing while collecting yield. That would be very bad money management. No matter what the cost of money is. Yes, the same money/credit is levitating the stock market, the real estate market and the overall economy. I have been saying that for years. In fact, I am predicting a bear market that is about to start based on my mathematical and timing work.
Thanks again for the comment.
Alex
2017 is here and while the institutional slumlords may not be acquiring as much as they were, they’re showing growth in most markets and control so much of the market, I don’t think they will just dump inventory. Afterall, the last downturn, they feasted on cheap real estate like the rats that they are. Wishful thinking but unless you’re talking about some market with super tight supply and lots of money like california, the institutional slumlords are here to stay. They’re making a lot of money.