One market indicator I frequently use - as subjective as it
might be - is the level of media attention given an asset class.
I'm particularly interested in an asset class's "entertainment
Residential real estate
has been resurrected to capture viewers and sell ad time on cable
television. A number of shows, across various outlets, are
predicated on a repetitive theme: buy a house, rehab it and then
flip it for big bucks. Drama is injected through personality
conflicts, surmountable setbacks and unanticipated
The message? Big money can be made on the quick for anyone
willing to enter the real estate game.
is a sign that the unsophisticated neophyte wants to keep the
momentum going, for the unsophisticated neophyte is also the
marginal buyer. He's the last man to enter the game, which is why
the popularity of these shows frequently correlates with market
Of course, media attention isn't the only indicator the
residential real estate market is effervescing.
In the good ole days - say 2010 and before - the single-family
residential rental market was the domain of small partnerships
and the ambitious individual. But today, institutional investors
have crashed the party in a big way.
Blackstone Group (
has spent $4.5 billion to acquire 26,000 single-family homes.
American Homes 4 Rent, the brainchild of
Public Storage (
founder B. Wayne Hughes, has spent $2.5 billion to amass 14,000
single-family homes. Both firms are buying and rehabbing to
This institutional-investor money has helped re-inflate home
prices in many metropolises - most notably Phoenix, San Francisco
and Las Vegas.
A few institutional investors are keen to share their good
fortune with you and me (though a cynic might view it as an
attempt to cash out at a top). Blackstone is publicly traded, and
American Homes 4 Rent hopes to be, having recently filed for a
$1.25-billion initial public offering (IPO).
That said, American Homes faces a contentious reception.
Colony American Homes, a REIT focused on leasing single-family
homes and managed by Colony Capital, postponed an IPO, citing
poor market conditions. Carrington, an early entrant to the
REO-to-rental market that's backed by
OakTree Capital (
, also recently withdrew an IPO.
As for those that have floated, response has been tepid.
American Residential Properties Inc. (
a REIT that renovates, leases and manages single-family
properties - persevered and went public last month. But ARPI
shares are down 7% from the offer price.
As for the multi-family rental market, apartment REITs have
been one of the more popular investment classes. But popularity
leads to lower yield:
Post Properties (
Essex Property Trust (ESS) -
AvalonBay Communities (AVB) -
3.2% yield. For many of these REITs, risk
no longer jibes
(At the other end of the yield spectrum reside mortgage REITs,
but don't get suckered by the high yield.
a couple months ago why mortgage REITS are riskier than many
Rent growth also gives reason to pause.
Axiometrics - an apartment data and research firm - reports
rent growth slowed to a 3.1% rate in April, the slowest pace of
the past 32 months. Falling rent growth is nothing new, though.
Axiometrics reports rent growth has been moderating since July
Rising property prices coupled with falling rent growth is
hardly a recipe for real-estate investing success. Unfortunately,
any fallout in the investment market won't be contained to
investors. Innocents are at risk as well.
In many markets, investors are involved in up to 30% of
residential real estate transactions, thus helping to elevate
home prices - rental and owner-occupied alike. If the latter buys
into an unsustainable trend, he could find himself underwater a
few years later should investors start exiting en masse if the
numbers no longer work.
It's dangerous to assume the numbers will always work.
Och-Ziff Capital Management
) - one of the original institutional entrants in the
single-family rental business - recently exited the business,
noting that rental income was "less than expected."
So if you are a denizen of reality cable television, watch for
the entertainment, not for the investment ideas. And if you are
treading into the equities market to invest in residential real
estate, tread carefully, especially in the newer offerings.
After all, institutions don't float new issues to benefit you
and me. They float them to benefit themselves. Our financial
success, if there is any, is secondary.