The real estate conversation in many corners has been dominated by the potential impact that ‘institutional investors’ may have had and will continue to have on the housing market. Institutional investor is a term used to define organizations which pool large sums of money and invest those sums in securities, real property and other investment assets.
These large institutional investors are buying residential properties throughout the United States. The New York Times recently reported that the Blackstone Group, the largest investor in single-family rentals in America, has recently bought 26,000 homes and that Colony Capital owns 10,000. There are other such firms also adding to their portfolio. In a recent Seeking Alpha article, Chris Martenson revealed that JPMorgan has initiated a fund to buy up to 5,000 homes and that Morgan Stanley has raised money to buy up to 10,000 homes.
Some are concerned that renters and absentee landlords may not properly maintain these properties. Others wonder what would happen to prices if these large scale buyers became large scale sellers.
What Could Be the Impact?
We must first realize that the number of homes being purchased by this type of investor, even if 100,000, pales in comparison to the 5 million homes projected to sell this year. Also, these investors are concentrating in the hardest hit areas where they can find the best investment opportunities. In an article last week, DSNews revealed:
“Institutional purchase activity has been especially notable in seven metros areas—Atlanta, Los Angeles, Las Vegas, Miami, New York, Phoenix, and Tampa.”
The article explained that the impact of this type of purchase would be stronger in these particular markets.
“In these markets, the impact of their exit will be more strongly felt.”
What About Going Forward?
With both prices and interest rates rising, many of these institutional investors may already be winding down their purchases. Bloomberg, in a recent article, quoted Hedge fund manager Bruce Rose, chief executive officer of Carrington Holding Co. LLC a fund that has managed over 25,000 rental homes:
“We just don’t see the returns there that are adequate to incentivize us to continue to invest. There’s a lot of — bluntly — stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible.”
The article also revealed that Och-Ziff Capital Management Group LLC , a $31 billion hedge fund managed by Daniel Och, has stopped putting money into rental homes.
The reason these firms are beginning to back away is that they are not seeing the returns they had hoped for. Bloomberg reports that Colony American Homes Inc. has found tenants for only 51% of the 9,931 homes it bought. American Residential Properties Inc. and Silver Bay Realty Trust Inc., two additional investors, both reported losses in the quarter ending March 31.
The impact of the institutional investor has yet to be fully determined. However, based on their limited purchasers as compared to all sales and their current uneasiness to continue with these purchases, the overall effect will probably be limited to a few markets that originally saw the greatest interest from these investors.