BlackRock's Real Estate Strategy: Renting or Hoarding for Inflation?
BlackRock has been accumulating substantial investments in real estate, primarily focusing on single-family homes. This strategy, akin to hoarding cash in a more tangible form, raises several questions. Is BlackRock aiming to become a significant player in the rental market, or are they simply finding a safe place to 'park' their vast capital amidst a challenging economic climate?
An Investment Strategy for Significant Returns
Initially, the primary aim seems to be an investment strategy intended to produce substantial returns through a combination of rental income and appreciation. The increase in single-family home prices has been exponential, which fits the profile of a promising investment avenue. However, the rise in prices also exacerbates the affordability crisis for many families, making it exceedingly difficult for them to secure homeownership. If I had the power, I would outlaw any corporate ownership of single-family homes to prevent this widening gap in access to housing.
A Buying Spree Post the 2008 Great Housing Recession
Starting from the aftermath of the 2008 Great Housing Recession, BlackRock has been acquiring single-family homes in massive lots. For instance, they purchased over 7,500 properties near Atlanta alone. Even now, with rental markets doing well, they don't seem inclined to sell these assets. The primary question remains: what would they invest in next?
As an investment firm, they likely have excellent cash flow with a good return on their assets. Historically, real estate has been an effective hedge against inflation. Given these factors, it might be more strategic to refine their asset allocation. For instance, selling off assets in fringe markets, holding through the next economic downturn, or even strategic consolidation and selling more premium properties to allow for a fresh start during the next economic downturn, say in 2022-2024. The idea is to reinvest in better opportunities after the market has corrected.
Home Prices on the Rise
The current surge in home prices can be attributed to a combination of factors. A large amount of money is staying in savings, and mortgage rates are very low, contributing to the rapid rise in property values. This environment makes the real estate market especially attractive for investors like BlackRock, given the potential for significant returns.
Corporate Ownership and Development Potential
When a company purchases vast blocks of private homes, it's natural to wonder if they see potential for development, perhaps infill projects or the renovation of larger, more expensive homes on the same land. If their main goal is rental income, they may choose to form separate LLCs to manage these properties.
An Appeal for Rental Income
Given the current market, the returns on single-family homes are exceptionally appealing. Multifamily properties are typically traded at ~3 cap rates, and multifamily debt trades at around 3, while BlackRock can earn 5-7% from renting such homes. This differential in potential returns makes single-family homes an attractive investment for them.
In conclusion, BlackRock's strategy in real estate is about more than just stashing cash. It's about strategic investment, potentially leading to rental opportunities or development. As the market continues to evolve, it will be interesting to see how BlackRock navigates these opportunities and challenges.