Carlyle Group LP, the second-largest private equity firm by assets, has spent about $2.5 billion betting on the U.S. housing recovery since late 2008. Only $10 million has been for
The firm is buying and building apartment properties after investing in about 50 multifamily projects over the past two years, said Robert Stuckey, Carlyle’s head of U.S. real estate investing. Washington-based Carlyle also is wagering on mortgage bonds that it started to acquire in October 2008 when prices tumbled during the credit crisis.
While other buyout firms also are capitalizing on distressed home-loan securities, Carlyle’s focus on apartments, an established industry for institutional investors, separates it from rivals including Blackstone Group LP, the largest private-equity firm, and Colony Capital that are rushing to purchase foreclosed single-family homes to rent, planning to manage thousands of properties that increase in value as the residential real estate market recovers.
“Our posture is there are better ways to play the housing recovery” than buying single-family houses, said Stuckey. With the bond investments, “our approach enabled us to buy at about 30% of replacement cost, marketable securities, and we don’t have to mow the lawn.”
Carlyle has used about half of its current $2.34 billion Carlyle Realty Partners VI fund for multifamily after first investing in the sector in 2000. The firm has deployed capital from Seattle to Dallas to New York after demand for rental housing soared when millions of people lost homes to foreclosure and lenders tightened standards for residential mortgages.
In January, Carlyle acquired a parcel in Las Vegas to develop a 255-unit complex of rental townhomes called Elysian Southern Highlands. It also bought a newly renovated 45-unit apartment building and adjacent land parcels in Chicago’s West Loop where it plans to develop more than 100 additional units.
“Carlyle saw the opportunity in the multifamily space earlier than some other opportunity funds,” said David Hodes, co-founder of Hodes Weill & Associates, a real estate advisory firm, in New York. “At the time they were gearing up, there wasn’t a lot of capital for multifamily development but there was a lot of demand for finished product.”
Apartment construction in the U.S. has been rebounding from a 50-year low in 2009 as developers race to meet rental demand. The two-county region including Seattle is seeing the most apartment construction in 25 years, while development is surging in the Washington area, Miami and Boston.
“Apartments are one of the only property types where development can make sense right now based on the level of rent growth you are getting,” said Ray Huang, a multifamily analyst at Green Street Advisors Inc. in Newport Beach, Calif. “We are still positive on the multifamily space.”
Demand is so strong that some new projects are pre-leasing large numbers of units before construction is complete, said Stuckey, who has run U.S. property investing for Carlyle for more than 14 years. “It feels unusual” to sign leases before the project is done, he said.
The recovery in the single-family home market, by contrast, is just beginning, he said.
Given the size of the housing market and the amount of distress, Carlyle isn’t ignoring it. The firm made a limited investment, spending $10 million of equity to buy about 60 houses in the Atlanta area, mainly through foreclosure auctions, Stuckey said. Carlyle’s investments have been made through Sylvan Road Capital LLC, an Atlanta-based company started last year by Oliver Chang, former head of U.S housing strategy at Morgan Stanley.
“It’s a big investment concept and that’s why we’re taking it seriously,” Stuckey said. “We’ve got a toe in the water.”
“It’s hard to find a private-equity firm on the planet that doesn’t have a strategy in this space,” Gary Beasley, chief executive officer at Waypoint Homes, said in January at the American Securitization Forum’s annual conference in Las Vegas.
Single-family homes to rent is a relatively new strategy for institutional investors, suggesting that returns ought to be higher than for multifamily because of the greater risk, said Green Street’s Huang.
The kind of apartments sought by institutional investors, usually properties with 50 units or more, are priced to deliver internal rates of return, a measure of investment yield used by private equity firms, of almost 7%, according to Huang.
Return expectations for single-family rentals ought to be more like 7.5% to 8% to compensate for greater risk, he said.
