Institutional Investors Create New Asset Class - What Do You Think About It?

Question

Hi all.

I've been reading a lot lately about institutional REITs and came across this article today: Starwood Waypoint Rises in First Day of Trading as a REIT (Bloomberg).

"Corporate landlords have raised more than $20 billion to buy as many as 200,000 homes in the past two years, creating a new institutional asset class out of the traditional mom-and-pop business of single-family rentals."

My question is for buy & hold investors:

Are you seeing the impact of these big REITs in your local markets? Do you think institutions will ultimately push out the small investor in certain areas? For those of you who market for your own deals, are you seeing increased competition from the big companies?

Just curious what your thoughts and experiences are regarding the changes in the "landlord" landscape.

Cheers,

Jessica

Tom A. · Answer

The new institutional investors may be able to distort a local market for a period of time as they buy up available inventory, rent them out, or sell them, but they're really dwarfed by the mom and pops and other investors.

The Bloomberg article states as many as 200,000 properties have been acquired in the past two years.  Sounds like a lot, but compare it to the total number of rentals out there.

There are 115 million households in the US.  The home ownership rate is 65.2%, so the rental rate is 34.8%.  That means 40,020,000 households rent.  The 200,000 is just 0.5% of the total pool of rentals.  Mom and pops, and other larger investors who've owned apartment buildings all along still own the other 99.5%.

Bill Gulley · Answer

Jessica, I'll play with or against the big boys any day! By that I mean, they could raise 10 Billion and they still can't buy them all. Nor will they buy everything out there, there will always be distressed properties.

I'm around a few Realtors and I've not heard of any corporate types buying up any FSDs. Our market here is tiny compared to major metro areas and the burbs.

In larger markets there may be competition. The greatest impact might be the manipulation of market rents.

They will need to have economies to scale and boots on the ground. Think about that. What would they be paying a local manager, some salaried person to oversee things. I bet they won't be paying much. That manager could very easily get creative in various ways to make a little more. The maintenance folks could also have good paydays. Just thinking out loud.

Replace the small guys, mom and pop, well, could be rough in some places. But not in more rural areas or even in areas like mine. Properties would be spread all over the place and difficult to manage from a centralized office or site. Just from a maintenance side, unless they had enough properties in a general area they can't hire a salaried fixit guy. That means local will either bid to be on call or they will be hiring as needed. I can hear that plumber now saying....oh, deep pockets!

And, what they buy will be sold again. Depreciation, physical and financial will hit an optimum point and they will probably dump them and replenish inventories.

I'll bet these REITs will perform, but they can suck them dry in admin, could be another balloon to pop!

A few months ago, I heard of a politician talking about doing away with private ownership, won't mention the political party but that's obvious I'd think, saying property should be in corporate hands. As absurd as that may sound, that type of thinking is out there.

They may have deep pockets but they can't operate and move in and out of a market as quickly as mom and pop. The REITs may be the heavy tanks in the economic war but they can't out maneuver infantry or the special operators. :)

Annette Hibbler · Answer

Hmmm, I invest heavily in Michigan, specifically the Detroit Metro area suburbs where there are still thriving communities and worthwhile investments.  I cannot say that I've come across any institutional investment issues.  I think that would probably be more true in the city of Detroit where prices for rentals & commercial real estate are sky high.  They keep it the prices out of reach for most.

However, a while back I did read something similar and that the ultimate goal of these institutions was to limit the scope of the small investor and control large portions of the market across the USA.  Which is why many banks make it very difficult for small investors to obtain funds.  In comes the private hard money lenders to the rescue (sort of).

Gary Hurst · Answer

Yes, I think so.  We have seen prices in Central Texas rise.  Properties that we could by for 40,50,60K are now selling for 60,70,80K.  Now some of these are coming back on market after the sale. So, I think some of the rise in prices are newbies coming in and over bidding.  But, yes I think its going to cost a little more due to the corporate investments.

Institutional Investors Create New Asset Class - What Do You Think About It?

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