The Rental Bubble Is Also Bursting

Tyler Durden's picture

Over the past year we have been closely following the slow motion bursting of the latest hot money, spec capital, and foreclosure subsidy-driven housing bubble, which has for now mostly impacted the peripheral areas like Las Vegas, where we reported housing demand has plunged by 20% while supply has exploded as everyone scrambles to cash out. The fact that the foreclosure wave has just turned and the number of California foreclosures recently exploded by 57% in one month merely is further confirmation of just how weak organic support for home prices truly was. And as the Emerging Market hot money wave turns (thank you taper) and as recyclable capital suddenly becomes scarce, look for this trend to hit the major metropolitan centers next, as even the wealthy investors finally pull back from the luxury US housing market.

However, even as the primary housing market was slowly circling the drain, the one silver lining was that the US rental market, largely dominated by several Wall Street investment firms, most notably Blackstone, was doing relatively well. It was doing so well that equity sponsors such as Blue Mountain couldn't wait to offload their prized REIT property to the public, culminating with last August's IPO of American Homes 4 Rent, the second-largest US homes-for-rent operator after Blackstone. And since the stock price of all these corporations was performing admirably or at all time highs, supported by the record fungible liquidity sloshing among the world's interconnected markets, nobody was very concerned.

It is time to get concerned.

Last night, American Homes 4 Rent (AMH) announced that Peter J. Nelson, its Chief Financial Officer, will resign his position, following a transition period, to "pursue other career interests. The company has begun the process of identifying Mr. Nelson's successor. Mr. Nelson is expected to remain with the company into the second quarter to complete the company's year-end financial reporting and to provide for an orderly transition for his replacement." That he made this announcement in such a hurry, without even having found a successor, speaks volumes about what is coming over the horizon.

For those who are confused about the significance of this departure, which may have marked the peak of the rental property bubble, here is a Bloomberg report that was released concurrently with the AMH announcement, and which confirms that the rental bubble has indeed popped.

Rents collected on the collateral for the first U.S. rental-home securities declined by 7.6 percent from October to January, according to Morningstar Inc.


Payments declined as expiring leases and early tenant departures left residences backing the bonds of Blackstone (BX) Group LP’s Invitation Homes vacant, Becky Cao and Brian Alan, analysts at Morningstar’s credit-ratings unit, said in a report. While 8.3 percent of the properties were vacant or occupied by delinquent renters in January, renewals on 78.5 percent of leases that expired the prior month exceeded the analysts’ expected rate of 66.7 percent.


The deal’s performance is being watched as Wall Street bankers and institutional property investors seek to follow Blackstone’s $479.1 million transaction in November with additional offerings. Initial lease expirations for the 3,207 homes are scheduled to peak from January through March, Morningstar said. To woo investors and rating firms in the new market, the transaction started with all of the units leased, unlike bonds backed by apartment-building loans.


One dealer was offering to sell top-rated notes from the Blackstone transaction for about face value today, according to Empirasign Strategies LLC, which tracks securitization-market trading. Some riskier slices were being offered by JPMorgan Chase & Co. for less than par last month, people with knowledge of trading said then.

And following today's Walmart news of yet another ugly quarter (with guidance for more to come), not to mention recent retail sales and general abysmal economic reports, we can only conclude that what was once America's middle class will soon be homeless, and using an EBT card for all their dining needs... but at least it will have unlimited and free global texting opportunities courtesy of Whatsapp, not to mention constant blasts by NSA, pardon, Facebook-hosted IP-tracking cookie enabled ads. The good news: since the polar vortex is largely over, at least sub-bridge living will be in largely balmy conditions if only for another 6-9 months.

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Moe Hamhead's picture

Walmart could always start charging for overnight parking.  For the homeless who still have an old Vega to sleep in.

Levadiakos's picture

Blackstone was hedging with long bitcoins

nuclearsquid's picture

Bah, nothing to see here.  The 5% risk retention obviously fixed the securitization market.  Oh wait?  The rules haven't actually been passed yet, even though its been almost 6 years since the crash?  Oh, and the real bankster overlords have already cashed out of Blackstone?  Oh well, I guess we are all fucked.

ZerOhead's picture

" ... renewals on 78.5 percent of leases that expired the prior month exceeded the analysts’ expected rate of 66.7 percent."

See? Better than expected!

Son of Loki's picture

My neighbor's son is renting  a house. He reads zh and educating himself ...and told his Landlord he wants a 10% cut in rent, or he is out....the Landlord agreed.

Sweet for him!

Most Landlords understand the costs of turnbovers, cleaning, etc so a 10% cut in a very soft market is a no brainer. There are dozens if not hundreds of house rentals available.

onewayticket2's picture

was the landlord his father?


JamesBond's picture

too damn funny!





knukles's picture

We don' need no steenking shelter!
We're exceptional!

onewayticket2's picture

the SYSTEM (not the DNA of the individual) was exceptional.   it's being made less exceptional every day we try to emmulate France (and Cuba)


the left does not want an "exceptional" system....because it creates and losers.  the left wants a system of "fairness" which, to them, is when there's equality of OUTCOME.....their "fairness" is the opposite of "exceptional"

ParkAveFlasher's picture

My wife's family owns a building in Long Island City (first stop on the Queens side of the East River in NYC), a gentrified nabe, home to Manhattan professionals and their ilk.  The tenants on the second floor, he an independent skilled contractor for the movie industry and she a restauranteur, can barely meet the rent each month.  Checks are bouncing and so forth.  The rent is competitive but the area is overdeveloped with new  luxury-intended units in shiny-esque towers and this could be a downward force on all rents ... you never know if there is a real pressure to lower rents or seemly pressure disguised as real pressure.  What I can say is that the new towers are backed by big money who can sit on the properties FOR NOW and wait for their prices to be met.  We are barnacles on big whales.

Omen IV's picture

same in happening in brooklyn - we reached a peak in the fourth quarter in NYC - just momentum carrying the rental rates - i think the city may be 20% ahead in rent prices right now on premium properties from where they should be or more

cro_maat's picture

I think you are being generous with the 20% premium. Where I live in Bushwick (PR, Dominican, Ecuadorian and up & coming Hipster section of Brooklyn for non New Yawkers) the average rent is so high that my neighbors are 2 to 3 families in each apartment. Even with that they usually have trouble coming up with the rent! The hipsters that can afford the new condos in Williamsburg, LI City, Dumbo, etc. either work for the Squid / Whale or are trust fund hipsters. The ones that have to work in the real NYC economy are builiding illegal lofts in the industrial section (now owned by the Chinese) from Greenpoint to Bushwick to Queens.

ParkAveFlasher's picture

It's always been that way regarding hipster affordability.  Billyburg used to be affordable, btw, now they sell $500 beachbags in trendy shoppes.  It's not fuckin West Broadway, people.  IMHO the news is that Chinese buyers are steadily occupying a belt from Bayside to Flushing.  Never saw Chinese in Brooklyn until last year, then EVERYWHERE.  Same with Maspeth as they have swarmed up the Plateau from Elmhurst.  They are buying any kind of bargain.  They are savvy.  They only do business with their own.

cro_maat's picture

If you didn't see the Chinese until last year you were looking in the wrong places. They first bought up all of the warehouses and import / export companies in the industrial zone. Almost every warehouse from Williamsburg to Maspeth is Chinese owned now. An architect friend who grew up in the Polish part of Williamsburg when it was a needle park said that this has been going on for more than 5 years.

I buy gold at HTDT Gold (Chinese owned) which opened a shop on Wall Street last year an the manager told me that the parent company in mainland China is now looking to buy rental properties all across the U.S. They know that the U.S. RE market is high but compared to the froth in China our RE is cheap LOL! This poor lady has to do 7 cities in 5 days looking at US RE!

Things that go bump's picture

They won't be able to keep that rental property once the war starts. 

ParkAveFlasher's picture

Ah yes, I did see the cheap product suppliers buying up the warehouses in the Newtown Creek Wasteland and I do see them when I venture to Western Beef to acquire juicy limes 8 for a dollar.  My comment is applicable to residential properties, I should have clarified that.  I would say five years in the Newtown Creek area is about right although the Chinese live chicken wholesaler right on the water just before Metropolitan Ave picks has been there for some time ...

Things that go bump's picture

I meant residential properties too. No foreign national of an enemy country will be allowed to own real property. Even 2nd generation citizens are liable to be in for an unpleasant surprise. Just ask our citizens of Japanese descent what happened after Pearl Harbor. Their businesses and homes were confiscated and they were herded into concentration camps where they were ill-fed, ill-clothed, packed together like animals, guarded by armed soldiers and denied medical care. With a little behind-the-scenes urging by certain parties whose patriotism can't be questioned, the government will confiscate everything the Chinese own that they can get their hands on. Then they will turn around and sell it to the banks and other campaign contributors and good buddies for a song. These in turn will realize a very tidy profit, high fives all around. What's the matter with the Chinese? They act like there's some sort of rule of law here. They or their heirs will be seeking restitution for the next 60 years if there's a war. If they are not even citizens, but Chinese nationals, they will have no recourse at all. 

Hongcha's picture

Interesting; and I bet you the Chinese owners are hiring off-the-boat and off-book subcontractors to put in or split off utilities for these illegal lofts.  They don't play by our rules when they can get away with it.

cro_maat's picture

Hongcha - You are probably right. If so, then they are just following the lead of the Hasidic Jews from South Williamsburg who have been into the illegal loft business for decades. Their mantra is ignore violation notices until TSHTF then bribe all necessary officials. Same as it ever was.

tip e. canoe's picture

 he an independent skilled contractor for the movie industry

the issue with him is that he might always be waiting for checks from his producers, which are most likely coming slower than normally slow because they are most likely waiting for checks from their corporate paymasters, which are also most likely slower than slow usual.   

shit flows downhill, and in a city where it's tough to kick out a tenant without paying a pretty price for a good lawyer for 3-6 months, it falls right on the landlord.    this is why the ones that consistently make real coin in the city diversify like mad to better spread the risk, like build cheap-fugly-ass shiny luxury condo towers with government tax breaks. 

the circle is indeed quite vicious when you think about it.   

TheReplacement's picture

And yet, in all the years of whaling, how many barnacles versus whales were killed by harpoons?  Just something to make you think.  They will all die someday.  They will be weighed and judged all the same as the rest of us.  There will be equality in that we will all be treated fairly according to the knots in the yarns of our lives.

That and we aren't France, which is nice.

ParkAveFlasher's picture

I did think on that analogy, and I didn't make it with a sense of futility but awakening.  The key is in casting off when the orcas start biting, you don't want to be cracked pepper on the filet.

kchrisc's picture

Had a friend that was running a small biz store in a Walmarted stripcenter before the dive of 2008. She saw a hit but was still running profitably and paying rent. The local landlord corp. came and raised the rents through out, but especially on the smaller biz shops. She had to close.

It didn't make any sense, but then the local corp. landlord used the low/lowered occupancy to negotiate loans and grants for upgrades and improvements, including having the town pay the cost of tearing down a defunct "out building." LOL

mmanvil74's picture

US Housing is still one of the least overbought asset classes, although, I am not as excited about buying at today's valuations as I was 3-4 years ago.  Either way, there are still few places on Earth with housing cheaper than USA.  This drop in rental rates is probably partially due to renters becoming buyers.  While housing may take a dip in some markets after a massive run up in values for the past two years, I don't see any housing bubble "2.0" in USA, especially if you can apply leverage based on 4% interest for 30 years.  

I know it is sacrilegious to be bullish about anything on ZH so I am not as bullish per se on US housing as I was in 2009-2011, although it is still among the lower risk, least overbought asset classes out there, with far less downside risk than SPX for example.  The idea that hedge funds like Blackstone control the US housing market is overblown, they are still a tiny overall player.  

Residential property in MIA, NYC, SFO, LAX, PHO, LAS should do fairly well real estate wise in relation to most other asset classes over the next 2-5 years barring a black swan US Dollar Bond collapse.  Most likely Yellen will have to go Taper Off by the end of the year and QE2DAMOON inflation will make today's real estate valuations look silly in five years. 

onewayticket2's picture

lots of friends who are realtors.  they say the only thing moving is $3MM and north.  doubtful - at least from this tri state market - that these are renters moving into the purchase mkt.

zaphod's picture


Your comment that the system was exceptional is exactly right. I wish more understood this. 

disabledvet's picture

on day the sun is shining...and then it just keeps on shining.

DoChenRollingBearing's picture

Son of Loki

That's an interesting tidbit.  Smart landlord.

Magnum's picture

Loki not a fucking chance in my market.  Rents are a SOLID $400 higher today than four years ago.  He might get a new carpet or stove but 10% off rent he takes a hike.  In fact I would deviate from my standard procedure and plan to raise him $80 month just for asking. What you describe is implausible unless the boy is doing some side gig for the landlord.  The ZH community likes to talk about inflation.  Point to rents.  Going up up up.  Don't kill the messenger.

tip e. canoe's picture

and you wonder why you get shit tenants who don't have any respect for your asset?

Magnum's picture

I posted yesterday about one set of shit tenants but those were Obama Bumper Sticker Tenants (OBST remember) who rode me hard, took every advantage, stopped paying, finally left behind tons of garbage and unpaid electric bills.  So what I took it in stride.  They're GONE now.  I have new tenants, the rent is upped $200 as well.  

cro_maat's picture

Magnum - While I agree on the overall point of your comment and especially the "inflation.  Point to rents.  Going up up up." I think that there is still some room for negotiation based on ability to pay. I was able to secure a great corner apartment in an up and coming Brooklyn nabe and still negotiated a couple of hundred off the rent. The landlord was happy to do this because of my ability to consistently pay (employer / position / W-2).

tip e. canoe's picture

your landlord is a smart man.

Kasperfx's picture


I'm not sure were you are but i know for a fact that the listing prices on rentals are for suckers,  who don't understand there's plenty on rentals on the market and to negotiate, you would be very surprised at what some landlords will take under what was listed, very very surprised . and the other group of suckers are the wannabe donald trump's that think if they buy a home of comparable stats will be able to get those prices, good luck with that.
Magnum's picture

That may be.  All I can say is that when I first got into it 6 years ago, my first property was all reay to go so I listed it and many times I would not get a single call for THREE DAYS.  Sometimes, I would re-post on Saturday morning and I might get two calls in a Saturday.  Sometimes I would post and repost, nothing for 4-5 days.  It took about 30 days and I had two tenants.

I recently had a vacancy and posted the property, and I was consistently getting 3-4 calls every day.  No shit.  On the day I leased it, I was getting a call every HOUR or two.

Things are different my friend.  Rents are higher and far more people are looking.  This is for March move-in.

April/May/June is when a lot of people are moving.

Kasperfx's picture

lol again no geo locations menas your full of shit realtor in my opinion..

Magnum's picture

LOL it does read like that but no, not an RE agent.

NidStyles's picture

You can not really cash out of Backstone once you find out who actually runs Blackstone.

DavrosoftheDaleks's picture

Are you saying that "all your base are belong to us"?

Jumbotron's picture


jbvtme's picture

since the '70's rents have 10 bagged while wages have doubled. we're coming back to equilibrium

tip e. canoe's picture

the problem is that prop taxes have at least quintupled (and that's being conservative yes?) and are continuing to climb.

rock meet paper meet scissors

gmrpeabody's picture

scissors meet renters ass...

fockewulf190's picture

Fits Long Island to a T.  Rents, taxes, exploded.  Lots of young people have left because it´s just too expensive to live there unless you have a high paying job. 

Rainman's picture

am I the only one who got that ?

hey, my very elderly mother-in-law , who is rich enough to wipe her ass with her commercial tenant's rent checks, went schizo the other day because her tenants are trying to beat her down.... I still can't stop laughing.

doctor10's picture

The securitization of shit remains a sweet business for Wall St