NEW YORK (TheStreet) -- The founders of Silver Bay Realty Trust (SBY), American Homes 4 Rent (AMH) and American Residential Properties (ARPI) have created a mistake that an investor never wants to make in becoming the market for undesirable assets, in this case, thousands of foreclosed single-family homes. Legendary real estate investor Sam Zell noted this in his remarks at the "Invest for Kids" conference in late October. So far, it has been the shareholders of those real estate investment trusts paying the price.
Speaking before a packed house at the Harris Theater in Chicago, Zell told the crowd that many lenders had come to him about buying up thousands of single-family homes that had been foreclosed on during the Great Recession. These are the very properties that make up the assets of Silver Bay Trust, American Homes 4 Rent, and American Residential Properties. Zell declined for several factors.
To start, he did not like the efficiencies of single-family home rentals. Zell preferred multi-family properties. For a five-unit apartment building, there is only one roof and one furnace to repair and eventually replace over the decades. There is also only one lawn to cut and maintain. For five single-family houses, there are five furnaces, five roofs, and five yards to cripple cash flow on an annual basis.
What concerned Zell even more was the trend of Americans moving away from the suburbs, where the single family homes are, into the cities.
This shift in real estate was detailed in a recent article in The Wall Street Journal by Lauren Weber, "Companies Say Goodbye to the 'Burbs." Since younger employees want to live and work in a city, more and more companies are leaving the suburbs for downtown digs. Weber quoted Enrico Moretti, an economist at the University of California Berkeley: "There's increasing evidence that this represents a broad trend among large- and middle-size companies."
What is the play for investors?
Shorting Silver Bay Realty Trust, American Homes 4 Rent, and American Residential Properties has certainly been rewarding. American Residential Properties' stock price is off by nearly 20% for the year. For 2013, Silver Bay Trusts is down 15%. American Homes 4 Rent has fallen more than 3% for the last week of market action.
Not buying foreclosed homes to fix up and rent out is another good idea.
The easy money has been made, noted Zell. Buying a foreclosed home is purchasing a property that the previous owners could not sell or rent out. It also means the lending institutions could not sell it to cover the balance of the mortgage. If there are loads of foreclosures in a neighborhood, that is about as bearish an indicator as there is in real estate investing in a given region. A foreclosure is not exactly a blue chip piece of real estate. It has been cast off and unwanted at many different levels by many different parties.
City residents are less likely to own personal motor vehicles due to the hassles. It is much easier and much cheaper to rent rather than deal with parking, tickets, taxes and the myriad of other factors that make owning a car in the city such an ordeal. Urban living is better when renting from Avis, Hertz or Ryder and simply tossing them the keys when the ride is no longer needed (make sure the tank is full when returning it, of course).
Living has certainly been better for the shareholders of these companies than those for Silver Bay Realty Trust, American Homes 4 Rent, and American Residential Properties.
For 2013, Avis Budget's stock price is up more than 80%. Contributing to that has been quarterly sales growth of more than 10%. Hertz Global Holdings has risen more than 50% this year with quarterly sales growth of 22%. For Ryder Systems, the stock price has increased over 40% with quarterly sales growth of nearly 4%.
A recent survey by the Urban Land Institute found that nearly 40% of respondents age 18 to 34 plan to live in a city. That is significantly higher than for other groups. These are the residents who will be renting or buying first homes. More likely than not, the increase will carry over for both renting homes and renting cars and trucks well into the future.
At the time of publication, the author had no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.