Big business bets billions on Atlanta's housing recovery
Could Wall Street's plan to buy up and rent out foreclosed homes boost hard-hit neighborhoods? Or inflate another housing bubble?Thursday January 24, 2013 04:10 am EST
David Zanaty sits in the corner of a Midtown high-rise office in upheaval. Half-filled boxes of staplers, paperwork, and other supplies lie next to partially dissembled furniture outside of his door. It's barely been six months since the 36-year-old took over as regional director for Waypoint Homes, a California-based investment company that recently expanded to Atlanta, but his branch has already managed to outgrow its space.
"I was with a division of AIG that went from over 20 people to three people," Zanaty says, referring to the bailed-out financial services giant. "Now, I'm at a company that went from one person to over 20 in Atlanta in just seven months." And it's ready to hire more.
Waypoint Homes is one of a handful of large investors that see opportunity in Atlanta's decimated housing market. The company is currently spending millions to buy up the glut of foreclosed and underpriced homes left in the wake of the economic downturn, fix them up, and rent them out. It already owns more than 3,000 properties around the United States, including an undisclosed number in metro Atlanta, and is working to acquire as many as 15,000 more in a handful of the country's major markets.
Banks seized more homes in Atlanta during 2012 than any other major metro area in the country, according to CoreLogic Inc., a company specializing in real estate data and analysis. Local home values showed some signs of improvement in 2012, posting the first gains in more than two years in September, according to an S&P/Case Shiller report. But at the end of 2012, houses in the metro area were still about 30 percent cheaper than the national average, according to Zillow.
"Basically, you can buy homes right now for less than it cost to build them," Zanaty says. "That's an important measure for investment. It means you own something intrinsically worth more than you paid for it."
About half a dozen other large investment firms like Waypoint are betting big on housing in metro Atlanta, spending millions of dollars monthly to purchase homes from auctions, trustee sales, banks, and listings services for less than they think they're worth. In the short term, the companies plan to rent and manage the properties, pay back investors with money from rental incomes, and eventually start selling off the homes in a few years after home values have increased.
Firms have also talked about offering rental incomes as securities to be traded on Wall Street, a practice similar to the mortgage-backed securities that went awry and contributed to the housing bust of the 2000s. Some investment analysts expect to see the first rental securities hit the market in early 2013, but they have yet to materialize.
The practice by large real estate investors of flipping homes for a quick buck is nothing new. But renting and managing properties has also long been the realm of mom-and-pop landlords who rarely have the means to expand beyond a couple dozen homes. With big business comes the prospect of big change. By quickly removing thousands of foreclosed homes from the market and turning them into rentals, these firms could potentially jump-start the slogging local economy, increase home values, and begin to rebuild communities in neighborhoods racked by vacant properties. But this real-life game of Monopoly has also attracted the attention of activists and other community advocates who say that the negative effects could outweigh the positive. They fear that some of the same executives involved in the devastating housing crisis are now laying the groundwork for another real estate bubble.
On a brisk January morning, more than 100 people stood on the steps of the Fulton County courthouse looking to buy a house. Once a month, flippers, investors, and aspiring homeowners hungry for a deal flock to courthouse steps across the state to purchase foreclosed and distressed homes up for auction. In the last year, however, some unfamiliar faces have joined the auction masses, often driving up prices and baffling long-time buyers by the amounts they're willing to pay. At times, they shell out more than market value for homes they're after.
"When we start getting into cases where they pay above market value I think it's just sloppy investment," says Elizabeth Warren, 29, an Atlanta native who has been buying, fixing, and flipping a small number of houses each month for more than a decade. Warren used to pick up an average of four or five houses at county auctions each month, but since investment firms started bidding over the summer, she and other buyers unwilling to pay the higher prices have scaled back their work. "I don't agree with their speculation about the market turning around so quickly. A lot of their model deals with speculation, and that's kind of how we got into this mess in the first place," she says.
Back at the courthouse, teams of bidders circle the auctioneers, checking properties up for bid against a list of homes they've evaluated as worthy investments. Bidders carry binders with details about hundreds of properties, including the maximum they're willing to offer for each. If they win, another team member steps forward to pay in cashier's checks. Properties sold at auction have to be paid for on the spot, and investment firm reps often carry millions of dollars worth of vouchers in folders or locked bank bags.
"We usually spend about $30 million a month between all the counties in metro Atlanta," says Carlton Washington, a district manager that evaluates hundreds of prospective properties every month for Colony American Homes, one of the largest investors buying up Atlanta area houses. The firm aims to purchase 200-300 homes each month, at times picking up more or less depending on what's available. In October, the group made headlines for spending $15.5 million in a single month, nearly as much as its three previous auctions combined.
Collectively, firms like Colony, Waypoint, Blackstone Group LP, Silver Bay Realty, Sylvan Road Capital, and others are trying to drive at least a short-term economic recovery in an effort to capitalize on a steady and growing demand for rentals. Prices of distressed properties have already started to increase faster than anticipated, thanks in part to heavy buying at county foreclosure auctions around metro Atlanta. There are signs some firms plan to speed up purchases before rising prices cut into profits.
Blackstone Group, the largest private investor in real estate in the United States since the start of the recession in 2008, has ramped up purchases of homes to turn into rentals. The company owns 16,000 homes around the country, and spent more than $1 billion in 2012 alone to pad its inventory. It's currently seeking to double its line of credit from $600 million to $1.2 billion to help with purchases this year, according to Bloomberg.
Silver Bay Realty is spending more than $40 million a month to buy homes in Atlanta and a handful of other cities. While many of the firms are mum about their activities in the Atlanta area, national estimates show as much as $9 billion has been raised to buy as many as 90,000 homes, according to Keefe, Bruyette & Woods Inc., an investment banking firm known for its financial research. That money is being concentrated in a few major metro areas still reeling from the housing bubble's bust, including Atlanta, Miami, and Chicago.
Last year, Phoenix's rock-bottom housing prices proved a fertile testing ground for many of the same firms now active in Atlanta. Heavy buying in the Arizona capital helped drive home values up more than 30 percent between November 2011 and October 2012, according to a housing report from Arizona State University's business school. The gains boosted confidence among private investors willing to bet on an emerging and largely unproven business model.
Each company has its own process for evaluating homes and their communities. In Atlanta, most are focusing on high-demand properties in middle-income neighborhoods often located in the suburbs and northern parts of the city.
"Our model is focused on finding those neighborhoods where people want to live," says Robert Lee, co-founder of Sylvan Road Capital, a Duluth-based company with rental homes in 10 metro counties and plans to expand nationally this year. "We look for things like good school districts, lower crime rates, and areas people want to raise their families."
After purchasing a home, firms spend anywhere between $5,000-$60,000, and sometimes more, to fix up the property. Multiply that by the thousands of homes being scooped up, and it works out to a slew of renovation work for many construction workers who have struggled to find steady employment since the economy tanked.
"It's an aspect of our business I'm very happy to have," says Rick Porter, president of Richport Properties. For more than three decades the company specialized in building new homes, but was forced to find other ways to make money after the crash. Porter says it's hard to gauge, but he figures that renovation jobs for large firms now accounts for about 30 percent of his business. "How long it lasts is another part of the phenomena, and that I don't know."
How long it lasts, and what sort of long-term impacts it has on metro Atlanta, remain to be seen. For now, at least, market trends seem to have given investors the confidence — and investment firms the money — to push ahead.
Rental prices in Atlanta, both for homes and apartments, have remained high. It costs at least 40 percent more to rent than buy as of August 2012, according to the most conservative estimates from Trulia Inc. People's attitudes toward home ownership have also shifted. In 2011, only 66 percent of Americans thought homeownership was a safe investment, compared with 83 percent in 2003, according to a report by Morgan Stanley outlining investment opportunities in the shift to "a rentership society."
The companies betting on Atlanta's housing market expect that trend to continue, and so do some former Wall Street executives. Oliver Chang, former head of U.S. housing strategy at Morgan Stanley and co-author of 2011's "a rentership society" report, quit his job to help launch Sylvan Road Capital last August.
If Chang is right, the trend marks a paradigm shift in how homes are rented and the way people live, at least for the near future. Every former homeowner forced to vacate during the economic downturn is a potential renter. That, combined with the fact that less people are buying homes, creates a huge demand for rental properties.
The dynamic of renting from one of these firms varies by company. Many bill themselves as one-stop shops, overseeing purchases, renovations, management, and maintenance of the homes. Others choose to partner with property management teams and other companies. Sylvan Road prides itself on having smaller field offices in the communities where it owns homes, saying the local presence allows it to be accountable and accessible to tenants. Other firms oversee properties in as many as 20 metro counties from a central office.
But the concern exists that Atlanta may be too flush with rental properties, and that oversaturating some neighborhoods could negatively impact the communities over time. Couple the large number of homes being converted to rentals with the thousands of apartment units currently hitting the Atlanta market, and some advocates worry the attention from big business could undermine Atlanta's real estate recovery nearly as fast as it rebounds.
Occupy Our Homes Atlanta, the offshoot of 2011's Occupy movement that's focused on the foreclosure crisis and its aftershocks, has begun the arduous task of tracking a growing list of homes recently bought by large firms such as Blackstone and Colony American Homes. The group is working on a strategy it hopes will slow the number of homes being converted into rentals by these investment companies, starting with a door-to-door campaign to educate those with big business landlords.
"The major concern for us is Wall Street and the financial sector being involved with housing again," says Rob Call, a full-time activist with OOHA. "Sure, they're pushing up home prices, but the plan is to turn around and sell the homes in five years or so. It's intentionally creating a bubble."
"One of the big questions is whether the kind of stabilization in prices we're seeing, which in general is a good thing, is sustainable over time," says Dan Immergluck, a professor at Georgia Tech's School of City and Regional Planning and author of 2009's FORECLOSED: High-Risk Lending, Deregulation, and the Undermining of America's Mortgage Market.
"Another big question is what they do with properties that don't turn out to be profitable," Immergluck says. "If they see them as not profitable, they're less likely to keep them up, and they'll start minimizing investment in them, and then that could cause spillover problems."
Some communities could also be hampered by having too many renters, says John O'Callaghan, president of the Atlanta Neighborhood Development Partnership, a nonprofit that helps families deal with foreclosures and other housing issues.
"Having the right investors in neighborhoods to acquire, rehab, and repopulate homes can be a good thing, but if overdone you can start to do as much harm as good," O'Callaghan says. "If a neighborhood that had a good balance of home ownership and rental opportunities becomes over-concentrated in rentals, you could potentially see home values decline, and at that point investments may not be kept up in the neighborhood."
On the other hand, for some of the most blighted communities rattled with foreclosures, like Atlanta's Pittsburgh and Vine City neighborhoods, turning vacant homes into rentals could act as a stepping-stone to a more permanent and prosperous resident base, explains Immergluck.
"For the city, the bottom line is taking vacant and abandoned houses and putting people in them," says James Shelby, Commissioner of Atlanta's Department of Planning and Community Development. "Whether it's an investor or developer, as long as they're turning vacant properties to an occupied state that helps the city."
But LaShawn Hoffman, president of the Pittsburgh Community Improvement Association, isn't convinced. He says occupying vacant houses is only part of the issue, and that neighborhoods like Pittsburgh also need access to goods and services, such as grocery stores and retail outlets, to truly grow into thriving communities.
"I think there could be some value in purchasing dilapidated properties across the city of Atlanta to provide quality, affordable housing for moderate- to low-income families, but I don't think that would be a good strategy in my own neighborhood," Hoffman says. "We're already dealing with an almost 3-to-1 ratio of renters to homeowner-occupied residents, and we really have to start building the homeowner base in order to reach the level of revitalization we feel this neighborhood deserves."
A Grant Park resident, speaking on the condition of anonymity, says renting makes a lot of sense for him and his roommate, but he doubts they'll stay in their current home much longer. Last month, after their property was sold to a company owned by a large investment group, he says they were given a 90-day notice that their rent would nearly double. They could sign a new lease or move out.
"They've just set the fair market rent at $1,650 a month, which is a considerable hike and doesn't really fit the market," the resident says about his three-bedroom house a few blocks from Zoo Atlanta. "Somewhere more around the $1,200 or $1,300 range seems to be what's going in our area. If we can negotiate what we feel is market value we'll stay."
If they do decide to move, he and his roommate certainly won't be at a loss for rental options.
"This wave is coming. Good can come out of it, but there are going to be unintended consequences and those consequences may very well be negative," says O'Callaghan. "We as local neighbors, local governments, and advocates need to determine how we can incentivize those that are doing it right and provide barriers to the activities of those that are doing it wrong."