Blackstone's $10B Multifamily Buy Could Be A Starting Gun For Investors

The world's largest real estate owner’s plan to buy a huge portfolio of apartments may be the shot heard round the U.S. multifamily market.

Blackstone announced Monday that it has agreed to buy publicly traded apartment owner AIR Communities for $10B, signaling it is ready to go back on offense after one of the slowest years for commercial real estate sales of the century.

The purchase also sent a signal that now is a good time to buy multifamily assets, and investors flush with freshly raised cash could start to pounce with the belief that apartment values have reached a bottom.

“Anytime the largest buyer of apartments makes a huge move like that, I think there will be a little bit of groupthink behind it,” said David Moore, CEO of Dallas-based apartment investor Knightvest Capital. “Are we just going to sit around and watch Blackstone buy everything?” 

Blackstone is taking private AIR’s 76 rental communities, which are concentrated in major markets such as Washington, D.C., Atlanta, Miami, Philadelphia and Los Angeles. Blackstone said it would invest another $400M to beef up the portfolio.

News of the deal sent stock prices of other multifamily REITs up about 4%, the largest single-day jump since December, Bloomberg reported.

Following Blackstone’s acquisition of single-family home operator Tricon Residential for $3.5B, announced in January, its moves are raising eyebrows among apartment investors.

“This acquisition by Blackstone suggests that the market is turning the corner and the market may be moving back toward normalization,” Marcus & Millichap Senior Vice President John Chang wrote in an email. “The Blackstone acquisition suggests that institutional investor sentiment is beginning to shift gears.”

At first blush, the fundamentals in the U.S. apartment market don’t suggest that now would be a time for robust investment activity. 

Multifamily investment sales have been falling each month for 18 months as of February, while capitalization rates have steadily risen, according to MSCI Real Asset. Apartment prices have dropped more than 18% from the peak of 2022, according to MSCI.

Total multifamily sales volume fell 61% from 2022 to 2023, according to Newmark, and portfolio transactions like Blackstone's AIR purchase sank to a 15-year low.

A glut of new apartment units also helped stall rent growth and increase overall vacancies. Developers delivered more than 500,000 new units in 2023, an all-time high, with another 736,000 set to be completed in 2024, according to Dodge Data & Analytics.

Rent growth turned negative in the fourth quarter, according to Fannie Mae, which projects apartment rents to grow between 1% and 1.5% this year, below the historical average, with vacancy rates rising to 6.5%. Investors in multifamily in every major U.S. market saw negative returns last year, per Newmark.

But there are signs of market improvement. The National Association of Home Builders is projecting that new apartment starts will fall by 20% this year, down from 472,000 units in 2023 to 379,000 in 2024.

The precipitous drop-off in new developments is also being fueled by higher borrowing costs, tight labor markets and elevated construction material costs, experts said.

And while rents declined in 13 of the top 30 metros last month, the U.S. overall saw its largest rent gain in 20 months in March, according to Yardi Matrix. RealPage updated its 2024 apartment rent forecast to project that 12% of the 50 largest U.S. apartment markets are likely to see rent grow by at least 3%, reflecting the “strengthening economic markets that influence the multifamily industry.” 

There also is plenty of money waiting to invest in multifamily. According to Newmark, there is $259B of dry powder in closed-end funds allocated to multifamily deals. The asset class makes up the largest share of investment dry powder allocated to U.S. CRE at 35%, according to a Q1 Avison Young report. 

On top of that, America’s entry-level home ownership market has been decimated in recent years due to a lack of construction and institutional investors with deep pockets buying up single-family homes and turning them into rentals. 

For many households, it has become cheaper to rent than to own. The “buy premium,” or the monthly cost of a new home purchase versus a lease, reached an all-time high of 52% in 2023, according to CBRE.

“There is still a shortage, and there will continue to be a shortage of housing in the country. New starts have all but stopped completely, leading us into a dearth of new supply in 2026 through 2028,” JLL Executive Managing Director Matthew Lawton said in an email. “As jobs continue to be added and population growth and migration to the Sun Belt markets persist, the near-term excess supply will be absorbed, causing significant rent growth in years to come.”

Blackstone sees an opportunity in the apartment market, a spokesperson told Bisnow. With $65B in capital to deploy, the private equity giant is going on the offensive because of what it sees as a bottoming out of real estate values, according to the spokesperson.

“The implied cap rate based on the premium that they’re paying is a sub-5[%] cap [rate]. That’s strong,” Moore said. “For what we call an institutional quality deal, I think the bottom is pretty much here or close.”

Most sellers are still hoping that values will rise before they bring their properties to market. But the gap between the price they hope to get and what buyers are willing to pay could now be shrinking.

“A lot of us have been sitting on the sidelines waiting for the market to shift in a way that makes sense,” said Lisa Hurd, chief investment officer for the Atlanta-based real estate investment company RADCO Cos. “I think Blackstone’s move, it signals a shift in investor sentiment.”

Shea Campbell, CBRE’s vice chairman and managing director of multifamily investment sales in the Southeast, said he is seeing a deeper pool of investors bidding on apartments when they hit the market. That's especially pronounced in markets where buyers can reasonably estimate near-term rent growth, where the pipeline of new supply has dwindled compared to other regions. Fannie Mae noted supply-constrained cities like Kansas City, Cincinnati and St. Louis experienced above-average rent growth.

“I feel the capital coming back into the space whereas it felt like there was a lot of groups … on the sidelines. You can feel it just on our bid sheets and tour activity,” Campbell said. “I do think there is a sentiment from the private investor, there has been a thought, ‘Hey, we should be buying before the big institutions get back into the space.’”