The tan, three-bedroom house on Chicago's North Side sits half a block from a Family Dollar store and a pawn shop—an unlikely patch of gold to mine for Blackstone Group LP in the single-family rental market.

The world's largest alternative-asset manager is among investors buying distressed properties in the Chicago area after private-equity and hedge-fund firms helped send property values surging in hard-hit markets such as Phoenix and Atlanta. That demand, along with low mortgage rates and a growing economy, is now fueling a recovery in the third-biggest U.S. city as it joins the housing resurgence that already has bolstered much of the country.

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