Wall Street made major purchases and rented them out during the foreclosure crisis. Now it's back to the suburbs hoping to score again.
Faced with the pandemic demand for larger living spaces, institutional investors are investing money in single-family homes. Not only are they buying houses on the open market, but they're also funding subdivisions – they're inventing a new way of living suburban living that is easier to afford, but where the financial benefits of home ownership go to Wall Street businesses.
Blackstone Group Inc., Brookfield Asset Management Inc. and JPMorgan Chase & Co.'s asset management arm have each placed new bets on the industry since the beginning of the COVID-19 cases, focusing on one type of major real estate investor that were ignored until 10 years ago.
The investments come from the fact that publicly traded single-family landlords outperformed homeowners and social distancing efforts are making traditional commercial properties, including hotels and retail properties, less attractive.
"It was a combination of the growing up of the sector and performance during the pandemic," said Dana Hamilton, director of real estate at Pretium, whose Progress Residential manages around 40,000 rental properties. "Single family homes were an island of strength during the storm."
For decades, Americans have flocked to the suburbs in search of more space, better schools, and a break from everyday life in the city. These traits have become more relevant in the age of COVID-19 and unrest in U.S. cities where President Trump promises to defend the suburban lifestyle.
Whether landlords are buying existing homes or building from scratch, they want the same things that families have always preferred. That means free bedrooms, large garages and good neighborhoods.
However, the new wave of investment shows how the single-family rental industry could transform the US housing market and offer affordable homes whose residents do not benefit from rising values.
"It's not a substitute for trying to build wealth, but it gives you more options when you're trying to figure out where to live or when you're trying to build credit," said Cheryl Young, an economist at Zillow.
On a September morning, several work teams were busy at one of American Homes 4 Rent's new communities in Lake Stevens, Washington, about 35 miles northeast of Seattle. Rent is approximately $ 2,700 per month for a four-bedroom, fenced-in back yard in the 27-house estate that winds through a road that ends in a roundabout that leads to a wooded area and elementary school.
There's little that sets the neighborhood apart from some of the others nearby developed by traditional home builders, and tenants are moving in about as quickly as the homes are finished.
American Homes was founded in 2012 by self-storage billionaire B. Wayne Hughes and in its early years built property management systems for operating homes acquired after the foreclosure crisis.
After rising property prices made it harder for the company to find bargains, it decided to build rental homes for itself. Nowadays, new communities are opening at the rate of about one per week, CEO David Singelyn said in an interview. The company's share has increased 51% since the market bottomed on March 23.
Christopher Bernard, 34, signed a lease on a new American Homes lot in Eagle Mountain, Utah, about 40 miles south of Salt Lake City, after he and his wife were unable to close a newly built home in the area. The rental house has a nicer finish and costs less per month than what they would have paid for a mortgage.
"Someone who owns their house is no different from someone who rents," said Bernard, who teaches at a nearby university. "I'm proud because I can let my child run around on the lawn."
American Homes, which has raised $ 625 million through a joint venture with JPMorgan's asset management company, isn't the only company to offer earmarked rents. Another early player in the industry, Amherst Group hired a former construction manager as chief operating officer this summer to buy land and build their own homes. A former Colony Capital Inc. executive raises $ 1.2 billion in equity and debt to build 5,000 rental homes.
It will not be easy for institutional landlords to redesign the suburbs. Competition for construction workers, building materials, and land could hold back rental developers, while low mortgage rates help boost property prices, making it more difficult for tenants to buy property.
According to John Burns Real Estate Consulting, mom and pop landlords still own the vast majority of single-family homes. Large investors control around 2% of all rental apartments.
Still, the industry has become a popular way for Wall Street to capitalize on the rising demand for housing, especially as millennials look for more space and struggle to find homes they can afford to buy.
"If you take a step back, there won't be enough houses and not enough affordable housing," said Drew Flahive, who runs Amherst's single-family rental business. "Our main focus in this deal is creating a supply with such high demand."