REITs of passage

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CHARLOTTE – Fewer people own their own homes now than since the mid-1990s, not necessarily because they don’t want to buy, but because they can’t.

Apartment rents and occupancy rates are as sky-high as all those new, under-construction and just-announced apartment buildings.

And while good deals on foreclosures are getting scarcer, real estate investment trusts are on the hunt for new investments.

Those conditions, analysts say, have combined to produce a new phenomenon around the country and in the fast growing metro market of Charlotte:

REITs are having new, single-family homes built, largely in stalled subdivisions, with the express purpose of renting them to the growing market of people who want to live in houses but can’t afford the down payments or qualify for loans.

The first homes to be built under contract with two REITs by Charlotte-based Oakmont Home Builders have recently been sold to the investment firms, making the names of the REITs public for the first time.

The American Home Real Estate and Partnership LP of Atlanta closed this month and in late April on more than 15 homes built by Oakmont, according to Mecklenburg County deed-transfer records, which are not complete and up-to-date. The homes are in two subdivisions including Reid Meadows, where Oakmont owner Judson Stringfellow last October told The Mecklenburg Times he would build as many as 40 houses for a REIT. He declined to name the firm because its leadership wished to remain anonymous. Stringfellow has pulled 15 permits to build in Reid Meadows in the past 12 months, according to county code-enforcement records.

Another REIT, Scottsdale, Ariz.-based American Residential Properties LLC, has closed on two Oakmont homes in the Thompson Brook subdivision and another one in the Plott Road subdivison, the deed records say. Oakmont has more under contract with American Residential, Stringfellow said. The county awarded Oakmont 15 permits over the past year to build in Thompson Brook and another nine in Plott Road.

Executives at neither investment firm would comment on the deals. Stringfellow would talk only in generalities about the homes and not about their sales to the REITs, citing the investors’ wishes. And telephone calls to the National Association of Real Estate Investment Trusts, which represents REITs across the country, were not returned.

But Charlotte housing analyst Chuck Graham of Charlotte-based Newton Graham consultants said the new-homes-for-rent phenomenon – as well as the most established practice by REITs of buying up distressed properties and renting them – made financial sense given the current economic realities and the near-term future possibilities.

“The market is right for people who want to rent houses instead of apartments,” Graham said. “And instead of flipping the houses right away, before the market is just right, investors want someone living in those houses for cash-flow purposes while they wait for the housing market to come back and they can flip the houses then.”

Graham said owning single-family homes also has “tax shield” benefits for companies.

The building of new rental homes is a variation on a REIT theme in the post-housing-bubble era: buying distressed properties to manage them as rental properties.

The giant Blackstone Group owns some $2.5 billion worth, according to several reports published in January.

The investors often “warehouse” them because they haven’t found the manpower to get the homes in shape to rent. That’s the case with about half the properties acquired by Blackstone, according to the published reports.

By using a builder specializing in first-time-buyer homes such as Oakmont, REITs can acquire houses at modest prices, and they’re new, which is attractive to renters. While it sometimes builds larger, more expensive homes, Oakmont typically builds its starter homes for around $55,000 to $95,000 on lots worth around $13,000, according to the county building permit and tax records. The Oakmont starter homes typically retail for the $110,000 to $135,000 range.

Stringfellow said he builds homes for the REITs with the same specs and to the same standards as his starter homes.

The renter market is being driven by the exploded housing bubble, Graham and other analysts say. Younger people who might have been first-time homebuyer candidates a few years ago are increasingly content to rent. And experienced homeowners, burned by short sales and foreclosures, the shrinking job market and/or the Great Recession in general, are jumping out of the ownership ranks.

Now, theoretically, former homeowners could wind up renting the same homes they lost to mortgage holders with little or no drop in their monthly payments.

Former and hopeful homeowners could naturally be more attracted to renting a house than an apartment, Graham said, and turning single-family rental houses into for-sale houses would be more financially attractive for investors than switching apartments to condominiums because while the market for buying single-family homes is showing signs of a slow recovery, condominium sales are still in the tank.

But apartment-dwellers are definitely on the rise because of the bust, Graham and other analysts say; apartments remain steady at or near 95 percent occupancy, and new apartment complexes are going up at a progressively faster pace in rapidly growing markets such as Charlotte’s.

The international analytics and consulting firm Capital Economics reports that the homeownership rate has reached its lowest point since 1995, and predicts it could fall as low as 64 million, meaning the market will have 9 million more renters than at the peak of homeownership seven years ago.

And although they are reaching the levels of monthly mortgage payments, rents remained attractive even after home prices fell because they come without the 20 percent down payments being demanded by banks after the financial crisis. According to the annual Housing Landscape report from the Center for Housing Policy, 26.4 percent of working renters spent more than half of their household income on housing costs in 2011, compared with 2008’s 22.8 percent.

Charlotte is better off, with only 23.3 percent of renters in the same housing pickle.

At the same time, rents have driven up housing costs for working renters nearly 6 percent between 2008 and 2011, despite the fall in home prices. Meanwhile, median incomes fell more than 3 percent, the Housing Landscape study reported. The Center for Housing Policy defines “working renters” as those making less than 120 percent of an area’s median household income, said Janet Viveiros, assistant director of research at the Center.

Despite the stampede to rentals, Graham said he remains bullish about the future of sales for both new and existing single-family homes and does not agree with naysayers who argue the U.S. is becoming a renter nation. “I believe (home sales) will rebound despite all the old normal/new normal” chatter, Graham said.

But for the present, April’s existing-home sales are “up but constrained” according to the latest National Association of Realtors monthly figures released Tuesday.

So REITs will probably invest more in new rental homes and hang on to their existing ones into the foreseeable future.

BROWN can be reached (704) 247-2912, [email protected], or on Twitter at @tonymecktimes.