Private-equity firm Blackstone Group LP (BX) is making one of the biggest bets on rental apartments since the financial crisis.
The New York firm has agreed to buy majority stakes in 80 apartment complexes from the financing arm of General Electric Co. (GE) in a deal that values the portfolio at $2.7 billion, according to people familiar with the agreement. The apartment buildings, with roughly 30,000 units, are in Dallas, Atlanta and other parts of Texas and the Southeast.
It isn’t clear how much equity Blackstone is putting up for the transaction, but it is expected to be close to $1 billion, these people said. A spokesman for Blackstone and a spokeswoman for GE declined to comment.
With the investment, Blackstone is wading into a debate in the real-estate-investment world over the future of the rental market. Apartment buildings have been the hottest real-estate sector since the downturn because of strong demand from people unable or unwilling to buy homes. Rents and occupancy rates have been rising while the prices investors have been paying for apartment complexes have moved into record territory.
But in recent months, some analysts and investors have begun to worry that the party is coming to an end. They have warned that the recovery of the single-family-home market will erode demand for apartments and that competition is increasing from new supply being developed in many parts of the country. “I would expect multifamily rent growth to begin decelerating because of the new construction,” said Tad Philipp, director of Moody’s Investors Service’s commercial-real-estate research.
Some big-name investors believe that the outlook remains bright. Earlier this year, AvalonBay Communities and Sam Zell‘s Equity Residential paid $6.5 billion in cash and stock to Lehman Brothers Holdings Inc. for Archstone Inc. That deal, which valued Archstone at $16 billion, including debt, was closely watched partly because auditors cited Lehman’s investment in Archstone as a big contributor to that firm’s bankruptcy filing in 2008.
The apartment sector is being boosted in part because most of the recent job growth has benefited people 34 years old and younger, according to Richard Campo, chief executive of Camden Property Trust, a Houston-based real-estate investment trust that owns and operates apartment buildings. “Those are our customers,” he said.
Investors who purchased apartment buildings early in the downturn have enjoyed sharp increases in value. Moody’s apartment index, which tracks the national average price of multifamily rental buildings, is up 59% from its 2009 lows, compared with a 35% gain for its National All Property Index.
The rise in values has been propelled by rent increases of 2.3% in 2010, 2.4% in 2011 and 3.8% in 2012, according to Reis Inc., a property-research firm. Vacancy rates, which hit a 30-year high at 8% in 2009, are now at 4.3%, a 12-year low.
In Houston, for example, average apartment rents increased to $799 a month in the second quarter, up 4.4% from the second quarter of 2012. In Seattle, rents were up 6.2% in the same time frame to $1,096.
The big question now hanging over the market is whether or not these trends will continue to push values higher.
In the past year, investors in real estate investment trusts have been getting increasingly wary. The compounded return for the apartment sector declined 3.23% in the past 12 months, compared with an 8.76% increase for all equity REITs, according to the National Association of Real Estate Investment Trusts.
But others point to a number of market forces that could keep renters in place longer than they otherwise stay during an economic recovery. Despite low mortgage rates, many would-be homeowners are finding that they can’t qualify for a mortgage because lending standards remain tight or because they don’t have enough regular employment to qualify for a loan. Others have dings on their credit or have struggled to save for a down payment.
At the same time, the supply of homes for sale remains constrained, putting a crimp on sales. While home prices have been rising, they still are down sharply from their 2006 peak in many parts of the country and many owners have been unwilling to sell at these levels.
Investors bullish on the rental apartment sector also note that lending is plentiful thanks to Fannie Mae and Freddie Mac, which have been providing financing to owners of apartment buildings. Buyers of other kinds of commercial real estate have had a more difficult time getting loans for their deals.
Mr. Campo said that while construction of apartment building is picking up, it slowed considerably during the downturn when new supply fell from an average of 250,000 units a year to 75,000 units a year in 2009 and 2010. Builders are only now starting to address that imbalance, says.
“It will take at least three or four years to fill that deficit,” Mr. Campo said. “Everything today is being built to meet new demand.”
Blackstone’s apartment purchase from General Electric is its largest U.S. real estate investment in two years, as it continues to buy from a record $13.3 billion global real-estate fund it recently raised.
In the past couple of weeks, Blackstone has gotten attention for its plans to sell high-profile property and hotel companies. The New York firm recently tapped four banks to prepare Hilton Worldwide Inc. for what could be a multibillion-dollar public offering, and it has taken steps to sell or take public two other hotel companies and a retail-property company.
But in the property market, Blackstone’s latest major acquisition shows that one of the biggest private-equity firms isn’t making a one-directional bet.
Blackstone has come relatively late to the rental apartment sector but it has been betting on the housing market in other ways. The firm has invested more than $5.5 billion to buy more than 30,000 single-family homes in about one dozen major U.S. markets. The strategy is to rent those homes out for now and sell them as home prices rise.
For GE, the sale is part of an effort to sell down its real estate portfolio. GE boosted its equity investments in commercial property in the years before the financial crisis, but its portfolio suffered during the downturn. The company has since taken steps to sell down its real estate holdings, which may have made it made it a motivated seller of the large portfolio.
It’s unclear if Blackstone plans to renovate these buildings, or how it intends to get the high-teen to 20% returns it usually seeks. Initial yields on apartment buildings nationwide are around 6%, and lower in popular markets, according to Real Capital Analytics Inc., a real estate data firm.
It’s also not clear how much equity Blackstone is putting into the transaction, but the firm typically relies on debt for about two-thirds the value of properties or portfolios it acquires. By that measure, Blackstone would be investing roughly $900 million in the GE transaction.
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