Following the real estate crash, it has become much more difficult for people to buy homes. The data are pretty clear – home ownership dropped from almost 70% at the peak to 65% as of the second quarter of 2013. Around five million homeowners have shifted from the ownership market into the rental market. And the apartment development pipeline has not kept up with the amount of renters who dropped out of the home ownership arena and the so-called “Generation Y” young adults who are coming into the rental market.
In our portfolio, occupancies are at an all-time high. Average occupancy in our portfolio is about 95%. Rent growth has been 3% to 5% year over year from 2012-2013. In some markets, we’ve seen 7% to 8% rent growth which is considerably higher than the 2% to 3% rent growth that you may underwrite in the normal market. We think the public apartment REITs and other large apartment investors would confirm the trend.
So people will continue to rent for a number of reasons, not the least of which is lack of credit to buy homes, higher down payments required by lenders and the flexibility that a renter has over someone who owns a home. Our generation of renters is somewhat transient. They move around a lot and switch jobs a lot. So having that flexibility of an annual lease is appealing.
Single Family Homes vs. Apartments
In addition to multi-family, which is our area of expertise, we’ve seen a lot of private money going into single-family homes, for the purpose of renting them. But there’s a big difference between the two sectors.
Some large investors – like private-equity firm Blackstone Group – are buying 20,000 to 30,000 homes and creating a renter business out of single-family homes. That is a completely different model. For one, it targets a different demographic. The single-family homes of three and four bedrooms that these firms are buying are targeting more of a family type of situation. In speaking to our rental staffs, I have not heard of a lot of cases where people move out of our rental communities into a rental home.
Renters, like the majority of ours, prefer living in a professionally managed, intact rental apartment community. They prefer that to a home that can be sold after a year or two, forcing them to move. So it’s more of an acceptable form of renting, being in a professionally managed apartment community. I don’t think we really compete with the single-family home rental markets at this point.
Renting homes is a completely new business for private equity. It’s an interesting capital-appreciation play. If they’re buying at 100 and selling five years from now at 150, it’s an interesting model. But for consistent cash flow and having to continually look for a renter who wants to live in a single-family home, I just don’t see it. Whether these firms will be successful or not, it’s too early to say. It’s really a new industry. Traditionally, this market has been dominated by Mom-and-Pop investors. And it works well for the guy who has 10 or 15 homes in his back yard that he’s self-managing.
And these firms are finding that the model is a lot more difficult than it looks on paper. And my guess is (some of the major investors now selling some properties) probably not a good run up in value from the time they bought at a low to date and they’re cashing out. Our model is based on long-term capital appreciation, sort of slow, steady growth. It’s not a quick flip in-and-out model. So it’ll be interesting to see how that model does over the near term here.
A version of this article first appeared on October 28, 2013 in the S&A Digest Premium, published by Stansberry & Associates Investment Research, an independent investment research firm. You can visit them at www.stansberryresearch.com. In this article, Michael Stein, cofounder of Pensam Capital focuses on the sudden rush of major investors renting single-family homes and the lessons they’re learning.