How Institutional
Investors May Affect the Rental Home Market
Although largely undetected, many of you may have heard
through the media of new investors with almost unlimited cash reserves that are
buying up the remaining distressed single-family properties by the hundreds in
areas of the country that were hit hardest by the foreclosure crisis, namely,
Texas, Florida, Arizona, Georgia, California, Nevada, and our very own
Washington State. Unlike traditional rental
home investors these investors are not experienced landlords. Instead they are publically traded Wall
Street firms that have amassed Billions of dollars of investment funds from
their clients to execute a carefully thought out acquisition and rental strategy. Among the largest players are: Blackstone, American Residential Properties,
Silver Bay Realty Trust, Starwood Property Trust, and Tricon Capital
Group.
Their strategy is quite simple and not different than those
of any small scale investor of the past.
They purchase homes (with cash) that are distressed and
undervalued. They improve the property
with carpet, paint, appliances and then rent these out at market rates. Their return will come in two parts: Rental operations and capital appreciation
when they eventually sell.
Because of the scale of their operations it is important to
understand how this changing dynamic is likely to affect the market place. Like any major change there are pros and
cons. Let’s take a look at some of
these.
Pros:
- The huge appetite they have for acquiring homes has quickly and significantly decreased the backlog of distressed properties which will help stabilize and sustain the market recovery.
- The increased supply of rental homes made available will help fill an increased demand for quality rental properties.
- Because the institutional buyers are so well capitalized it will be likely that the properties owned by them will be well kept and relatively free of deferred maintenance.
- Because the funds control Billions of dollars, the liquidity for buying distressed properties has increased dramatically over the previously troubled levels.
Cons:
- The pressure of meeting their home purchase goals and dwindling supply has forced the competing institutions to bid up the price for distressed properties thereby lowering their outlook for an acceptable return on the property. Based on purchase records in the Puget Sound area, it appears that in many cases they are paying more than market price for their acquisitions. This may also have the effect of creating a run-up in price (mini-bubble) that is not sustainable in the long run.
- The institutional purchasers are banking on the idea that they can keep their operating expenses low and recognize some economies of scale by managing the properties on a large scale national basis using call centers throughout the world with finely tuned policies and procedures. This one-size-fits-all approach may prove troublesome as effective property management is a very hands-on, boots on the ground, localized process that doesn’t lend itself easily to large absentee scalability.
- Increased supply of rental homes will drive down rental prices. In markets such as Las Vegas and Phoenix, where they have been acquiring longer and more aggressively have seen significant drops in market rents which will of course compress the yields for all investors and eventually translate to lower home values.
- Smaller investors are being squeezed out of new acquisitions. It’s difficult for the traditional, experienced landlord buyers to find good opportunities when they are competing against institutional purchasers with quick cash and a dulled price sensitivity. Of course, this is the free market competition at work and good for the economy provided they are making rational decisions. However, as we’ve seen with other publicly traded companies, judgment can be clouded when trying to gain a healthy return on the Client’s money conflicts with managers trying to meet corporate mandates and objectives.
- Eventually, to close the loop on their business plan the institutional owners will need to sell off their properties at, ideally, a highly appreciated price. When they all see the top of the market at hand, there will likely be a large supply of for-sale homes hitting the market all at around the same time. In many ways, the institutions business plan success will be most defined by how well they execute their exit strategy.
We’ll continue to watch the shifting dynamics of the rental
home market with great interest as it continues to evolve.
Feel Free to contact T-Square Properties if you’d like to
discuss your Rental Property Investments with our professionals. Since 1996, T-Square Properties is a full
service property management firm which manages over $140 Million of assets for
investor clients in the greater Seattle area that are seeking a professional
management strategy that will maximize their overall return.
