We are now well over a year into the pandemic and forbearance/eviction moratoriums abound with property owners and lenders essentially “stuck” with limited or no cash flow. Unfortunately, many in Washington and local governments do not fully understand how real estate and the mortgage markets work. What does this mean for residential and commercial real estate going forward? How will forbearance and eviction moratoriums supercharge this trend?
A little history on consolidation within 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.
Forbearance and eviction moratoriums will super charge the consolidation trend.
Although consolidation was happening before the coronavirus pandemic, the recent policy changes in Washington have supercharged the consolidation.
- Eviction Moratoriums: As eviction moratoriums have dragged on, smaller property owners are unable to weather the cash flow demands of not having tenants while meeting their mortgage obligations. With some evictions stretching to over two years only the biggest can survive and the smaller player will be forced to sell/exit the business
- Forbearance: With some mortgage forbearances stretching to almost 30 months, at some point there will be a wave of foreclosures. There are currently 10 million homes in some sort of forbearance and many will ultimately default. Larger companies with huge cash reserves will be able to buy large quantities of houses with much lower margins than individual investors due to their cheap capital. The tsunami of foreclosures will be a huge buying opportunity for large real estate rental companies and they will take advantage of the cycle to drastically increase their portfolios.
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. Furthermore, these rental companies have a long term horizon for purchases and these houses will stay off the market for an extended period of time drastically limiting future inventory and pricing many buyers at the lower price point out of the market.
We are entering a new paradigm in real estate. Residential investment property firms are rapidly growing by gobbling up houses throughout the country. This trend has been supercharged by Washington’s policies on Forbearance and eviction moratoriums essentially pushing smaller players out. 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 and upcoming foreclosure tsunami. 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.
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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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