Blackstone Group (NYSE: BX) is making a big splash in the single-family rental (SFR) market. Through its public, non-traded REIT (real estate investment trust), Blackstone Real Estate Income Trust, or BREIT, the company has agreed to acquire Home Partners of America (HPA) for $6 billion. That deal will give Blackstone control of more than 17,000 single-family homes across the country.
Here's a closer look at HPA and why Blackstone is making a big bet on the SFR market.
A unique SFR strategy
HPA owns a portfolio of high-quality single-family rental homes. It has a unique strategy. Unlike most SFR owners that hold these properties as long-term investments, HPA provides a clear path to homeownership for its tenants. Qualified prospective residents work with real estate agents to find a home that suits their needs and fits their budget in the communities HPA serves and meets its investment criteria. It then purchases the home and leases it to the tenant under terms that best fit their needs. Those terms include an option to buy the property at a predetermined price.
This strategy enables HPA to purchase homes with long-term tenants lined up and an exit strategy in place. Meanwhile, this relationship benefits its tenants by allowing them to get into a suitable home that they aren't ready to buy while setting them on the path to purchase it in the future.
Why Blackstone is investing in the SFR market
Blackstone has a history of investing in SFRs. The company helped form Invitation Homes (NYSE: INVH) in 2012 to purchase and rent out single-family homes in the wake of the financial crisis. The residential REIT is now the largest owner of SFRs in the country, with more than 80,000 homes. Blackstone took Invitation Homes public in 2017 and then cashed out of its investment in 2019. Meanwhile, it took a minority stake in Tricon Residential last year. Tricon owns and manages more than 30,000 SFRs in the U.S. and Canada.
Several factors are driving Blackstone's SFR investments. First, it sees strong underlying fundamentals in the rental housing sector. That's due in part to the millennial generation, which prefers the flexibility of renting over homeownership. On top of that, rising home prices and limited inventory have made it tougher to buy a home.
Meanwhile, real estate investors like the income generation and upside potential of SFRs. They produce steady rental income and benefit from above-average rental rate growth and rising home values. According to CoreLogic, rents on these properties recently saw their largest gains in 15 years, up 5.3% year over year in April. Meanwhile, the National Association of Realtors reported that the median existing-home price hit a record $350,000 in May, up 23.6% year over year, the strongest growth rate since 1999.
Rising investor demand for SFRs is leading institutional investors to go on an SFR buying binge. Corporate investors like Blackstone, Invitation Homes, asset management giant Blackrock, and direct-to-investor platform Fundrise scooped up 15% of the homes for sale in the U.S. during the first quarter. Many are buying entire neighborhoods of single-family homes directly from builders.
For example, Fundrise is purchasing entire communities in batches as builders complete them and leasing those homes to tenants. It plans to spend over $500 million to buy more than 2,000 homes across 12 markets over the next 12 months. Meanwhile, Invitation Homes intends to invest $1 billion in buying more SFRs this year. While these large corporate investors are likely driving up home prices in markets with tight inventory levels, they believe the returns from rising rental rates justify the cost.
Betting big on a major housing trend
Blackstone is getting back into the SFR market in a major way by scooping up HPA and its 17,000-home portfolio. Given its financial resources and scale, it can support HPA's growth as it works with more prospective customers to get them into homes that they can eventually purchase. In the meantime, its investors will benefit from strong market conditions that should enable HPA to steadily grow rental rates and investor returns.
Disclosure: Matt DiLallo owns shares of several Fundrise funds.