Giant investment funds fuel new boom in Pierce County real estate

In the past year, three of the funds have spent about $172 million on almost 1,000 properties, all destined to become rentals

Staff writerOctober 27, 2013 

  • WHO ARE PIERCE COUNTY’S BIGGEST HOME INVESTORS?

    On paper, the names of Pierce County’s top home buyers in the past 12 months are IH2 Property Washington, THR Washington II, various iterations on the name of American Homes 4 Rent, and FREO Washington.

    Who are they really? The top two are both subsidiaries of The Blackstone Group, the New York-based 900-pound gorilla of private equity. Its vast holdings include the Hilton hotel chain, Pinnacle Foods, The Weather Channel and the corporate parent of Sea World.

    Blackstone is worth about $31 billion, with $1.4 billion in revenues in the second quarter of 2013 alone.

    Early in 2012, Blackstone created Invitation Homes – the “IH” in IH2 Property Washington.

    Blackstone now owns more than 40,000 homes nationwide, and claims to be the largest single-family home rental company in the U.S. The publicly traded investment company has spent about $7.5 billion so far on home purchases nationwide. One media report said it had spent another $500 million just on renovations. The company, which is focusing on places hurt most by the housing bust, first invested in Florida, Nevada and Arizona. In Western Washington, Pierce County’s housing market was among the hardest hit.

    American Homes 4 Rent, which is in the middle of a public stock offering, is a real estate investment trust formed in 2012 that owns almost 18,000 homes in 21 states. Its chairman is B. Wayne Hughes, who co-founded Public Storage. American Homes has spent $3.1 billion so far on homes, according to information filed with Nasdaq.

    FREO Washington is a subsidiary of Pretium Partners, a New York-based investment group. Donald Mullen, a former Goldman Sachs executive, formed Fundamental REO last year to buy properties. Now known as Pretium Partners, it owns about 6,000 homes in nine states, according to a spokeswoman.

    Kathleen Cooper, staff writer

Last fall, the good news began trickling in. More homes are selling. Fewer homes are on the market. Sale prices are inching higher.

Finally, after falling off a cliff in 2007, residential real estate values in Pierce County were climbing back.

The drumbeat of statistical improvement has continued for about a year. What hasn’t been known until now is the role played by big money from out-of-state investors who swooped in after the market bottomed and gobbled up single-family homes at an unprecedented rate.

MORE: Out-of-state investors change local real estate landscape

About 1 in 10 houses sold in Pierce County in the past year wasn’t bought by real people. A News Tribune analysis of sales and property data between October 2012 and 2013 shows that three major private investment funds have spent about $172 million on almost 1,000 properties, all destined to become rentals.

The true number of investor-bought homes during the past 12 months is certainly higher than the 9.6 percent those three own. Local and regional companies are investing, too. That adds up to significantly more homes available for rent than ever before.

The shift in the local housing stock is historic, local brokers say, with unclear consequences for current homeowners and future buyers and sellers.

It’s not clear what kind of landlord these companies will be, and what effect they will have on the neighborhoods around them. Nor can anyone tell what will happen to the local economy if they decide rental housing isn’t a good bet anymore.

“This is no different from institutional investors being bullish in other commodities,” said Jody McNamer, a Gig Harbor-based real estate investor who has focused on the South Puget Sound region for 20 years. “They run those commodities up and dump their holdings after they make their profits. And little guys are all, um, what happened?”

So far, the presence of these massive funds mostly has helped the market. They’ve sopped up the homes on banks’ balance sheets, snapped up dozens of others at foreclosure auctions and most recently begun snagging homes straight off the regular sale listings. That has made it more difficult for some first-time buyers. But the funds have tightened the supply of available homes, which pushes up sale prices. These big investors also are spending big bucks locally on home repair as they work rapidly to spruce up the properties and get them rented.

What do investors get? Last week, Bloomberg News reported that The Blackstone Group, the nation’s largest institutional investor in single-family homes, plans to sell bonds backed by lease payments. Essentially, the company plans to turn the rental income from its homes nationwide into a securitized investment product.

Blackstone is buying those homes through its subsidiary, Invitation Homes. It is the largest buyer of single-family homes in the country, and in Pierce County. Blackstone’s chairman, Steve Schwarzman, told investors last week that Invitation Homes is making a long-term investment.

“We have no plans to sell the homes we own,” said Invitation Homes spokesman Andrew Gallina in response to written questions from The News Tribune. “The housing downturn has created an even greater need for affordable rental housing and we are filling the void with high-quality, well-maintained professionally managed single-family residences.”

The second- and third-largest buyers in Pierce County are American Homes 4 Rent and FREO Washington, neither of which made anyone available to comment.

WHO’S BUYING?

Invitation Homes is a subsidiary of The Blackstone Group, a massive investment company based in New York.

Blackstone is far and away Pierce County’s leading investor in single-family homes in the past year. Between Oct. 1, 2012, and Sept. 30, it bought 657 properties, compared with 185 by American Homes and 151 by FREO.

Blackstone started buying in Pierce County last November, but the top three hit the gas in the spring. Invitation Homes alone was acquiring about 100 homes a month between April and July, most of those bank-owned sales.

Pierce County is the epicenter for these three companies. By comparison, they’ve bought about 650 homes in King County, 340 in Snohomish County and just a dozen in Thurston County.

Information about the companies’ activities in Pierce County is based on sales data from Realist, a private commercial database, cross-referenced with data from the county assessor and auditor.

Gallina, the Invitation Homes spokesman, said the company invested in Pierce County because of strong rental demand related to Joint Base Lewis-McChord. Its offices are in Bellevue, he said, and it employs more than 100 people there. The company also has contracts with more than 150 other regional businesses, including contractors, brick masons, painters, carpenters and plumbers.

Invitation Homes is spending approximately 10 percent of the value of each home on its renovation, Gallina said, and spending that money locally. Based on The News Tribune’s data, that would put the company’s investments in Pierce County alone at about $11.2 million so far.

THE STRATEGY

Brokers with direct knowledge of Blackstone’s moves in Washington told The News Tribune that the company generally has a five-year plan: Buy low, fix cheaply, maximize rent, then sell high. Or, higher.

The brokers would not speak on the record for fear of damaging their livelihoods. Last year, a newspaper in Tampa Bay, Fla., quoted a local broker by name who was working with Blackstone to buy houses in the area. The day after the report published, the broker said he ended his relationship with the company because he wanted to avoid being sued. According to the newspaper, the broker said company officials told him that he “should have kept my mouth shut.”

That attitude is how they come across to competitors, too, one broker told The News Tribune.

“They are kind of bullies,” the broker said. “They are willing to pay more. The (smaller investors) have suffered. There are people who make a living picking up a property and fixing it up and feeling good about what they’re doing for the community. A lot of good people do that, and it’s been tough for them.

“We’re allowed to buy all the houses next to cemeteries and power lines and major arterials,” the broker went on, listing properties often less desirable to ordinary homeowners. The big investors “want product. They have a massive appetite for product.”

RUNNING UP THE SCORE

Local brokers representing smaller investors first started to notice the new kids at the County City Building, where foreclosed properties are auctioned every Friday on the steps outside.

The new bidders big-footed the regulars.

“They are overpaying for properties,” Kevin Knoben, a broker who regularly attends the auctions, said this summer. “Their people are given an amount they can go up to and it doesn’t matter where it’s located. They’re buying houses that would be assessed at $150,000 in South Tacoma and they’re paying $200,000 and up.

“They don’t care as long as they can put a renter in it,” he said.

Paying higher prices changed the behavior of banks that were auctioning homes, said broker Lorrie Garl, who buys properties on behalf of regional investors.

“Banks are setting opening bids higher because they know they can get it,” she said. “It’s made it a lot more difficult because (the big companies are) willing to pay market value and sometimes above, which is crazy to us, but they do.”

The News Tribune’s analysis, completed in early October after the heated summer shopping spree, showed the top three out-of-state investors have spent, on average, about $173,000 per home in the past year. American Homes 4 Rent has paid the highest average price, of about $180,000. Their homes generally are bigger — an average of four bedrooms and almost 2,000 square feet.

Blackstone and FREO homes generally are three bedrooms and about 1,800 square feet.

Each company has outliers. The most expensive home bought by one of the top 3 firms is a four-bedroom home in Fife. Built in 2006, it initially sold for $870,000. Blackstone bought it for $390,000.

MANAGEMENT QUESTIONS

The institutional investors’ plans for these homes long-term is an open question. If the companies ultimately plan to sell the properties, they seem to be making a bet that values will rise enough to allow them to recoup costs. In the meantime, some market trends support the idea of betting on rentals: First-time buyers face tighter requirements for a home loan. Overall rates of homeownership are not expected to hit the pre-recession peak.

Not everyone is convinced treating housing as a commodity is a good business plan.

“Houses have a lot more moving parts than soybeans,” said Michael Robinson, the owner of Windermere Professional Partners in Tacoma. “There are many aspects of a home that require maintenance and attention.

“People do bad things to houses if you don’t manage them,” Robinson said. “I’ve been a landlord since I was 18. I’m 54. I’ve seen and smelled a lot of things I wouldn’t have otherwise.”

Managing an apartment complex, where an on-site employee can keep an eye on tenants and their guests, is challenging. In single-family homes, Robinson said, “it’s easier for things to go off the radar.” Just a few bad tenants can cause very expensive problems.

In an interview published Sept. 19 in The Atlantic magazine, real estate titan Sam Zell echoed that idea. Zell, who founded one of the largest apartment companies in the country, said Blackstone has underestimated the challenge of managing so many homes spread all over the place. He also thinks the company’s voracious appetite might have led to many purchases that are less than strategic — buying in areas where values won’t rise as much as Blackstone needs them to.

That said, Zell acknowledges the market potential of rental homes. He’s investing in a company that also is trying to capitalize on them through a rent-to-own process.

Invitation Homes’ Gallina said beyond the short-term investment, his company is creating a new industry: a national single-family rental platform. Eventually, that business will be just as familiar to people as apartment companies, he said.

Though wide speculation is that the investors eventually sell the homes, Windermere’s Robinson said savvy investors generally invest in homes for the rental income, nothing else.

An investment strategy that counts on a regular rising market is a mistake, he said.

“Back at the peak, people were buying houses and calling them investments, but they were counting on appreciation,” he said. “Appreciation is a bonus. It needs to work without appreciation.”

‘HAVE TO LIVE SOMEWHERE’

Since the real estate bubble burst, millions of people have lost their home to foreclosure or short sale. That puts a big black mark on their credit. Those people won’t be able to buy a home for years. That is one of the major factors driving the market to produce more single-family rental properties.

“People who have lost their homes have to live somewhere,” said Becky Barrick, a broker who has done deals with Invitation Homes. “They have their things, their kids, their dog, and they want to stay in a certain school district.”

One of Barrick’s clients owned a two-story, 2,520-square-foot home in Puyallup that was built in 2004. The original owner paid $365,000 and lost it to foreclosure. Barrick’s clients picked it up in 2010, paying just $242,000.

In May, her clients had to relocate and needed to sell quickly. Invitation Homes paid $290,000 for it – 69 percent higher than their average spending price.

Such purchases show the company doesn’t limit itself to distressed properties. Its website directly solicits homeowners who want to sell their home.

“It was way more money than I’ve seen them spend,” Barrick said. “But when you get presented with cash offers, quick closing, how can you say no?”

Regular people who have bought a home know how it usually goes: several weeks of paperwork, and rounds and rounds of verification before the sale is done. Compared with that, the national investors are irresistible. They pay cash and close the sale in seven days.

A NEW BUBBLE?

Are these big-money investors creating another housing bubble? Time will tell. Sales data show they’ve started to slow their acquisition pace, but it could be simply a function of too little supply. National real estate data firm RealtyTrac recently reported banks still have a high number of foreclosed properties to dispose of. On its website, Invitation Homes offers ways for people to approach them individually to sell.

Invitation Homes’ spokesman wouldn’t say if it was done buying here. Bloomberg News has reported that Invitation Homes’ parent company has raised enough money to buy up to 200,000 homes nationwide. That’s a far cry from the 40,000 it owns now.

“By and large these big investment groups are bottom-feeding,” said Glenn Crellin of the Runstad Center for Real Estate Studies at the University of Washington. “They’re savvy. They don’t want to be too concentrated in residential markets,” particularly as construction of regular apartments continues to grow.

The people most immediately affected by the national investors have been the local ones. McNamer, the Gig Harbor-based investor, said the sudden appearance by Blackstone and the rest forced many small house flippers out of the business. Those who survived, like himself, did it by changing tactics.

“We’re small fish in the pond,” he said. “We turn seven to 10 homes a month. Compared to the big guys, that’s a rounding error.”

McNamer’s company, Paraissance Realty, started casting a wider geographic net, looking for things to buy in Kitsap County and beyond. Instead of buying properties and holding them, he’s fixing and flipping those the national investors don’t want. He hired a construction manager with decades of experience to do high-dollar rehabilitations. He’s buying empty lots here and there, then selling them to builders.

“We have our own company, and 300 other independent investors that we work with,” McNamer said. “We have to keep our investor base healthy. If they put their money out of state, and the national investors go away, that won’t be good for Washington.”

Tom Glaspie, an Olympia-based contractor who flips homes, said things were pretty scary for a while as the national companies took everything in sight. “It just got so tough to buy homes,” he said. “I have a company with a payroll. I have to have them working on something. I just chased the work.”

Glaspie said his crews have taken on dozens of homes, including some owned by the national investors. Like McNamer, he’s buying things they don’t want.

“I’ve been buying a lot of duplexes,” he said. “I hate condos, but I’m buying them and flipping them. We’re just adjusting and shifting and changing and learning.”

Kathleen Cooper: 253-597-8546
kathleen.cooper@thenewstribune.com
@KCooperTNT

Digital team leader Ian Swenson contributed to this report.

WHO ARE PIERCE COUNTY’S BIGGEST HOME INVESTORS?

On paper, the names of Pierce County’s top home buyers in the past 12 months are IH2 Property Washington, THR Washington II, various iterations on the name of American Homes 4 Rent, and FREO Washington.

Who are they really? The top two are both subsidiaries of The Blackstone Group, the New York-based 900-pound gorilla of private equity. Its vast holdings include the Hilton hotel chain, Pinnacle Foods, The Weather Channel and the corporate parent of Sea World.

Blackstone is worth about $31 billion, with $1.4 billion in revenues in the second quarter of 2013 alone.

Early in 2012, Blackstone created Invitation Homes – the “IH” in IH2 Property Washington.

Blackstone now owns more than 40,000 homes nationwide, and claims to be the largest single-family home rental company in the U.S. The publicly traded investment company has spent about $7.5 billion so far on home purchases nationwide. One media report said it had spent another $500 million just on renovations. The company, which is focusing on places hurt most by the housing bust, first invested in Florida, Nevada and Arizona. In Western Washington, Pierce County’s housing market was among the hardest hit.

American Homes 4 Rent, which is in the middle of a public stock offering, is a real estate investment trust formed in 2012 that owns almost 18,000 homes in 21 states. Its chairman is B. Wayne Hughes, who co-founded Public Storage. American Homes has spent $3.1 billion so far on homes, according to information filed with Nasdaq.

FREO Washington is a subsidiary of Pretium Partners, a New York-based investment group. Donald Mullen, a former Goldman Sachs executive, formed Fundamental REO last year to buy properties. Now known as Pretium Partners, it owns about 6,000 homes in nine states, according to a spokeswoman.

Kathleen Cooper, staff writer

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