Big investors reap whirlwind rental profits
Written by Scott Blake on August 13, 2014
Wall Street and other big investors are reaping the benefits of Miami-Dade County’s robust housing rental market, but to the chagrin of renters paying top dollar, market watchers say.
Those renters, they say, are often the same people who lost or gave up their homes during South Florida’s foreclosure crisis, among the nation’s worst.
Institutional investors that have been buying up all those distressed properties are now renting them out at premium rates to a vast pool of tenants, swelled by residents displaced by the region’s avalanche of foreclosures and short sales, says Peter Zalewski, a principal at CraneSpotters.com, a website that tracks South Florida’s condominium and apartment markets.
“If you look at how rents have gone up steadily, constantly since 2009, it seems like rents could continue to go up,” Mr. Zalewski says.
Rents are just about peaking in Greater Miami, he says, and it remains to be seen how much more rates can be stretched.
East of Interstate 95 in Miami-Dade, rents have increased by 24.3% since 2010, while rents west of I-95 have increased 17.7%, according to data CraneSpotters.com compiled from the Southeast Florida Multiple Listing XChange.
East of the highway, the median rental rate has risen this year to $1.74 per square foot. That means rent for a 1,000-square-foot apartment would be $1,740 a month. The median means half rent for more and half rent for less.
West of the highway, the median rental rate has risen this year to $1.33 per square foot, making the rent $1,330 a month for a 1,000-square-foot apartment there.
Just as banks and other firms bundled mortgages together and sold them as mortgage-backed securities, the new trend is the purchasing of properties and bundling them into rental-backed securities, says Bruce Jacobs, a Miami foreclosure attorney and host of the “Debt Warriors” radio show.
Hedge funds, private equity firms and other institutional investors buying up those rental-backed securities account for a large majority of the all-cash purchases for which the Miami housing market is becoming known, Mr. Jacobs says.
The problem, he says, is those investors are beating out conventional buyers – those that need financing, which in itself is now harder to get – and pushing them out of the market, often turning them into renters.
“I’ve been saying we’re going back to the feudal land system where there’s a concentration of ownership,” Mr. Jacobs adds, “and everybody’s paying what the landlord wants.”
However, Mr. Zalewski says some relief appears to be on the way for renters, thanks to the laws of supply and demand, which lately seem to have been suspended.
In recent years, statistics show, the number of rental units in the market has swelled – some from previously foreclosed homes, especially in the suburban markets west of I-95, and some from new construction, especially in the urban coastal markets east of I-95.
East of the highway, the number of rental units has grown 26.9% over the past four years, while the number of units west of the highway has ballooned by a whopping 36.3% during that time, according to data from CraneSpotters.com.
Moreover, developers have started construction or are planning thousands of additional condos in Greater Downtown Miami, according to the website. Mr. Zalewski estimates that far more than 50% of those new units could end up as rentals.
Despite the growing number of rental units, rents in Greater Miami have risen almost as much, indicative of a market in hyper drive, partly fueled by foreign buyers, both institutional investors and wealthy individuals, Mr. Jacobs says.
Yet it can’t go on indefinitely, Mr. Zalewski says, as eventually the new supply of units – particularly from all the new and planned construction in the Brickell and Downtown Miami areas – will catch up and should start to outpace demand.
That’s when rent increases will slow or stall, he says, adding that Miami could start seeing the beginnings of that trend in the next 18 to 24 months.
And moderating rents, he predicts, should eventually trickle out to the suburbs west of I-95, although in less dramatic fashion.
In the meantime, Mr. Jacobs says, in addition to the burden of high rents, many tenants can expect less service from their institutional landlords, who might own 100 buildings and can’t or won’t pay attention to each one’s needs.
“What we’re seeing,” he says, “is the largest transfer to real estate from Floridians – taxpayers, homeowners and residents – to Wall Street investment firms and foreign investment firms.”
Add that to the fact that most homeowners who have become renters have downsized their living space. Often, Mr. Jacobs says, the only way families and others can afford to rent a house or apartment is to take in more roommates by renting out a bedroom or two.
“They’re not paying as much [in rent] as they once did on their mortgages,” he adds, “but it’s not far from it.”