We are seeing interesting economic times; throughout the economy there is huge consolidation within industries as the big get even bigger. Real estate is following a similar trajectory to big technology companies. What is causing the huge changes in real estate? Will this trend continue? How does this impact real estate prices?
What is happening with consolidation in the real estate industry?
- Commercial: Commercial real estate kicked off the consolidation trend years ago with Blackstone now holding the crown of the largest real estate owner in the world with 100 billion under management. They are the Amazon of commercial real estate. Simon property group leads the way in retail and Prologis specializes in light industrial. Commercial real estate has quickly consolidated with large players gobbling up assets throughout the country.
- Residential: Until the 2008 crisis, residential real estate was composed of smaller mom and pop and regional players. After the 2008 meltdown multiple companies were formed to gobble up foreclosed houses on the cheap. Companies like Blackstone, American Homes for rent, and others now buying one in ten residential properties in the United States. Wall street backed firms own 40 billion in residential real estate and they will continue to get bigger. Investors have bought nearly $900 million of new shares sold by the two largest rental companies since the pandemic began. Other home-rental operations have also sold nearly $6 billion of rent-backed bonds in an effort to raise cash in order to capitalize on the market uncertainty to purchase more properties.
What is driving the consolidation and why are the big getting bigger?
- Cheap capital: With Yields as low as they are and stock market high, capital is cheap to raise via stock sales or bond purchases. This provides ample ammunition for new purchases as distress opportunities arise.
- Increased regulations: Multiple governors and the federal government has put in multiple regulations that have prohibited evictions. Many smaller players can’t absorb tenants not paying rents for an extended period of time. For example, in Colorado, with all the moratoriums tenants can stay in a unit for almost a year before an eviction can be filed. A smaller owner will be hard pressed to be able to continue to pay the mortgage, taxes, insurance, maintenance, etc.. On the other hand, larger public companies have substantially higher cash flow and can absorb these costs.
- Economies of scale: the larger home rental companies have economies of scale that can drastically lower their costs. For example, American homes for rent manages 53k homes, they have on staff maintenance, leasing, etc…. to substantially reduce their costs dues to the sheer quantity of homes
- Demand for yield: with 10-year treasuries holding close to zero and commercial real estate languishing there is a large hunt for return. Residential investment real estate fit the bill of a safe stable asset with consistent cash flow.
Will these trends continue?
We are just seeing the beginning of the radical changes in residential real estate. These trends will not only continue but accelerate. As more homeowners run into financial issues due to the recent pandemic, large wall street corporations have raised lots of cash just waiting to be deployed.
How will this impact real estate prices?
If you look at where the defaults will likely occur in lower price points with homeowners with little equity, this matches up perfectly to the desires of large home rental companies. This will essentially put a “floor” under real estate prices as demand and available cash from the rental companies will ensure that prices do not fall too far if at all.
Summary
We are entering a new paradigm in real estate. Residential investment property firms are rapidly growing by gobbling up houses throughout the country. Wall Street firms now buy one of every ten houses today and that number will surely climb with the insatiable demand for yield coupled with ample capital. Residential real estate is poised to continue consolidation like the commercial real estate industry which will not only lead to profound changes in the rental market but also create a floor under real estate.
Additional Reading/Resources
- https://www.wsj.com/articles/millions-are-house-rich-but-cash-poor-wall-street-landlords-are-ready-11600421401?mod=hp_lead_pos5
- https://www.wsj.com/articles/meet-your-new-landlord-wall-street-1500647417
- https://economictimes.indiatimes.com/industry/services/property-/-cstruction/consolidation-in-real-estate-may-speed-up-amid-covid-19/articleshow/76477074.cms?from=mdr
- https://blog.realestate.cornell.edu/2018/10/23/reit-sector-likely-to-see-more-consolidation/
- https://seekingalpha.com/amp/article/4121471-outlook-reit-sector-2018
- https://www.businessinsider.com/blackstone-is-largest-owner-of-real-estate-2015-11
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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