Peak Housing 2.0: Sam Zell Dumps 23,000 Apartments In 2007 Deja Vu

If you’ve been apartment shopping in the US lately, you might have noticed that rents are becoming more and more unaffordable seemingly by the month. 

We’ve documented the inexorable rise in the cost of renting on too many occasions to count, but for those who need a refresher, we recommend rereading one of our more lengthy treatments in “The Mystery Of The ‘Missing Inflation’ Solved, And Why The US Housing Crisis Is About To Get Much Worse”, published late last month. In it, we explained why riotous laughter invariably ensues every time the Fed tells Americans that inflation is negligible. 

In short, the collapse of the housing bubble transformed America into a nation of renters as the following chart of the homeownership rate makes abundantly clear:

That means that when Janet Yellen talks about low inflation, she’s talking to a nation which is struggling to cope with the following reality on a day to day basis:

When looking at the above, and when considering that, as we reported over the summer, in no state can a minimum wage worker afford a 1-bedroom apartment, one might be tempted to suggest that the top is in. 

But not so fast. 

It’s also possible that between crippling student debt and demographic shifts, the homeownership rate will continue to plunge.

As things stand today, household formation is being delayed as new graduates cope with i) a jobs market that churns out waiters and bartenders rather than breadwinner jobs, and ii) a student debt burden that averages $35,000 but is in many cases far higher. Meanwhile, a shift in the population to include more Hispanic Americans is also putting pressure on the the percentage of Americans who own a home. These factors could provide a tailwind for the market for the foreseeable future and that, in turn, means rents will only rise further. 

One person who’s betting that we may have hit peak-rent is billionaire Sam Zell who just dumped a quarter of the apartments held by his real estate company for some $5.4 billion. Here’s more via WSJ:

Sam Zell has agreed to sell more than 23,000 apartments controlled by his real-estate company, Equity Residential, for $5.4 billion to Starwood Capital Group, the companies said.


The transaction, announced Monday, represents about a quarter of the units in Equity Residential’s portfolio of apartments and would be one of the largest since the recession. It also comes on the heels of Blackstone Group LP’s announcement on Tuesday that it is buying Stuyvesant Town and Peter Cooper Village in Manhattan for $5.3 billion.


Across the commercial-property sector, which includes office, retail and apartment buildings, growing numbers of investors have begun to question how long good times can last after a steep run-up in prices since the downturn.


Record values for offices and hotels in the U.S. and Europe, fueled in part by central banks’ multiyear efforts to keep interest rates near record lows, have prompted some big investors to reassess the market. Apartments have been especially hot, with average U.S. rents climbing 20% over the past five years, according to research firm REIS Inc.


The transaction brings together two savvy deal makers on opposite sides of the trade, Mr. Zell and Starwood Capital Chairman and Chief Executive Barry Sternlicht.

Why is the deal particularly notable? Because Zell has traditionally had a very keen nose about such things as "market peaks": the 74 years old is credited with calling the top of the real-estate market in 2007, when he sold another of his companies, Equity Office Properties Trust, to Blackstone for $23 billion. Soon after, the commercial-property market crashed as prices fell and debt defaults surged.

As for the current cycle, this deal merely marks the latest liquidation by Mr. Zell’s since 2012. Back then, Equity Residential was a buyer. The firm teamed with AvalonBay Communities to purchase apartment giant Archstone for $6.5 billion, not including about $9.5 billion in debt.

But Equity Residential has become “less aggressive as buyers of assets” in recent years, Mr. Zell said in an interview late Friday. Instead, it is getting out of suburban markets and into downtown urban centers, where young people are moving and where it is more difficult to build, he said.


Most of the 23,300 apartment units in the deal, roughly a quarter of Equity Residential’s total, are low-rise and mid-rise units in suburban markets in and around southern Florida, Denver, Seattle, Washington, D.C., and Southern California. Analysts expect a significant amount of new supply to be concentrated in those markets in coming years.


For Mr. Sternlicht, who made his name in the hotel industry, the move represents a big wager on apartments. His Greenwich, Conn., company has bought or put under contract 67,800 apartment units over the past year, including the Equity Residential deal.


“This is the healthiest U.S. apartment market in my lifetime,” Mr. Sternlicht said in an interview Friday. “We don’t see that trend reversing.”

Maybe not, but on the other hand, it's only a matter of time before renters are simply priced out of the market. Because while the BLS can seasonally adjust rent payments to make them as low as a bunch of bureaucrats want, the bigger problem is that US household income is not only not keeping up with rent inflation, it is far below it. In fact, as reported last month, real income is now back at 1989 levels!

As Harvard's Center for Housing Studies noted in a recent report, the cost burden on renter is rising at a remarkable pace:

This would seem to suggest that Zell - who also called the top prior to the collapse of the housing bubble - may end up looking like the smart money before it's all said and done. 

As for what happens to cash strapped renters if Sternlicht is correct... well, there's always the basement...

We close with Zell's warning from last year: "This is the first time I ever remember where having cash isn't such a terrible thing, despite the fact that interest rates are as low as they are,"