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Single-Family Rentals May Be Reaching an Inflection Point
The single-family rental market in the U.S. is steadily ballooning. But for all its recent flash as a playground for big institutional names such as Blackstone, the market still hinges on smaller owners.
Mike McKinney started buying single-family homes in Memphis, Tenn., in 1994, just a few years after the savings and loan crisis.
He — with a friend — began with about five homes that year and then gradually bought “one here and there until around 1998 or 2000,” he said.
McKinney, who has worked a full-time gig over the years while doubling as a private landlord and single-family rental (SFR) investor, mostly slowed down his buying until the subprime mortgage crisis hit and crashed the U.S. economy in 2007.
Starting that year, McKinney would go on to buy about 10 homes annually for the next five or six years as the global financial crisis of 2007-2009 unwound itself and lenders began dumping heaps of foreclosed homes off at auction at county courthouse steps.
“I borrowed up to the hilt and bought everything I could buy while the market was down,” McKinney told Commercial Observer. “I had eight to 10 rentals at the time, and, down the block from a house I had [previously] paid $120,000 for, I was seeing them go for $80,000 — and rents weren’t going any lower. I knew they were way below value, I just didn’t know when it’d come back.”
McKinney’s game plan, though, was just a drop in the bucket at that time. While he said he was making “cash offers on the courthouse steps” on foreclosed homes in Memphis, large investment firms — such as Starwood Capital, Colony Capital and Blackstone Group — were essentially doing the same thing, except they were armed with institutional money.
About two decades later, a heavy majority of the existing SFR market is still made up of owners and landlords like McKinney, many of whom are now sought after by institutional investors who are eager to get their hands on rental homes in a space that is soaring, rather than collapsing. How long the current state of the economy will allow the SFR market to keep humming remains to be seen, though.
Colony Capital was one firm doing courthouse crawls, buying in bulk, in the Sun Belt in the early 2010s. Blackstone was another; it helped create Invitation Homes in 2012 to be the feeder for the more than 30,000 homes it bought out of foreclosure for around $10 billion. Blackstone took Invitation Homes public just five years later, and the company quickly swallowed up SFR holding companies created by Colony, Starwood and Waypoint Real Estate Group, creating the SFR beast it is today. Invitation Homes is now the largest SFR landlord in the country, sporting more than 80,000 homes and a roughly $24.2 billion market cap.
Calabasas, Calif.-based real estate investment trust American Homes 4 Rent also ballooned into a SFR behemoth out of the financial crisis, with its buying campaign beginning in 2012, led by investment dollars from the Alaska Permanent Fund Corporation; American Homes 4 Rent went public a year later and eight years on, it flaunts a $13 billion market cap. JPMorgan Asset Management formed a $625 million joint venture with American Homes 4 Rent in May 2020.
Blackstone cashed in on its Invitation Homes bet in 2019, selling its significant interest in the business for $1.7 billion, but now, the global, market-making investment manager has made moves to get back in the SFR game. About six months after the pandemic hit last year, Blackstone — together with a syndicate of investors — made a $300 million minority investment in Toronto-based SFR and multifamily investor Tricon Residential, and, early last month, it was reported that Blackstone was planning to up its stake to nearly 12 percent as part of Tricon’s U.S. initial public offering.
SFR growth was materializing pre-pandemic and only accelerated afterward. Like housing became a hot talking point around the turn of the last couple real estate cycles — driven by distress and bargain-bin buying — SFR homes have emerged again as a key topic of debate, but without being shrouded by a theme of distress.
“It’s an emerging asset class that’s maturing by the month,” said Berkadia’s Cody Kirkpatrick, who is a managing director within the firm’s joint venture equity and structured capital group. “A handful of years ago there were a few [larger] players, and the yields were outsized, and now you’re seeing a huge influx into this space. Nine out of 10 private equity calls — with insurance companies or money managers — have an interest or some allocation and are trying to break into this.”
Plenty of eager investors are itching to get their place at the table, with their eyes on diversifying and expanding, despite rising home prices that have some believing the housing market could be at or near peak levels.
Ivy Zelman, the housing research analyst who’s known for having pinpointed the peak of the housing market in 2005, just before the crash that followed about two years later, recently told Bloomberg in an interview that she’s seeing “yellow flags” in the market. Zelman doesn’t foresee a massive crash akin to the global financial crisis, but she pointed to a number of risk factors, including price distortion in many markets from investors bidding up houses to the extent they’re unreachable for “primary buyers” and home builders who are bidding up land values to unsustainable levels as they try to grow their construction pipelines.
Zelman said the real risk is that a large swath of investors will eventually get frightened and move to sell, overloading the market with supply, and once the pipeline of under construction rental homes comes to market, demand will have diminished.
“If I’m a homebuyer right now, I want to wait because I think we’ve gotten to a level that’s not sustainable,” Zelman told Bloomberg.
Lindsay Jarvis, the CEO of Estero Investments, a small- to medium-size rental home investor and developer with about 500 homes currently in production, told CO that he sees nothing but a clear runway for outperformance in the SFR and build-for-rent (BFR) spaces. Existing market dynamics and the current state of the economy back that up, at present.
Historically low interest rates; soaring home prices; a lack of home supply coupled with heightened demand; migration patterns from businesses and people away from expensive and tax-heavy states and urban centers; labor shortages; more expensive materials costs; and supply chain issues, which have created significant construction delays — are all factors that Jarvis said will only help buoy SFR growth.
Zelman, though, in her conversation with Bloomberg, said even a modest rise in 30-year mortgage rates could possibly bring demand to a halt.
“It feels to me this is an asset category that is in fashion right now. That’s not to imply it will go out of fashion, but I think it will continue to be hotter than it will sustain,” said Jeffrey Pyatt, the CEO of Broadmark Realty Capital, a direct lender to BFR homebuilders. “Short term [investment from larger investment firms] will have an outsize impact. They’re buying up inventory and buying up renters, in effect, because there are only so many people who want to rent a home. If they are buying it in large tranches, they will certainly get their fair share.”
Earlier this year, the federally backed housing financier Freddie Mac released a report that says the country is undersupplied by around 4 million single-family homes, which, in a perfect world, means that it could take some of the nation’s most active homebuilders more than a decade to catch up, according to recent building estimates widely reported by housing trade publications. The supply gap has only widened over the last year or two as builders have struggled to keep up with accelerated demand, due to pandemic-caused supply chain issues, Jarvis said.
Jarvis and his Estero partner Kevin Burrell own two BFR companies that operate across the Sun Belt, from Tennessee to Florida and as far west as Phoenix, targeting markets by “working backwards from population growth,” Jarvis said. Burrell said that build times for small pools of SFR homes used to fall between 120 to 150 days, and now they can range from nine months to a year from the ground up, and he added that in some cases over the last several months, his group has backed out of land bids in some markets because other firms have pushed prices too high.
“The flip side is the longer the delays are in the supply chain, the more valuable it is when it’s delivered,” Jarvis said, alluding to demand-driven values in the market. “It’s taking longer and longer to get subdivision approvals, but, by the time it’s finished, it’s more valuable than what we anticipated.”
The BFR arena is where existing and prospective institutional investors tend to want to play, of course, as it’s a much easier way to scale and take advantage of today’s market, sources told CO. BFRs fill the supply gap in strained markets, benefit from strong new lease effective rent growth figures and are easier to manage, compared to buying and assembling portfolios of scattered sites of existing home stock.
Stephen O’Neil, a senior vice president of investments at The Resmark Companies, which partners with owners and builders to invest in BFR communities, likened the hype around SFRs and BFRs to multifamily right after the 2007 global financial crisis. Resmark got into multifamily in the early-to-mid-2010s and benefited from strong performance that followed.
“The millennials that drove the last multifamily cycle are a decade older and don’t want to be living in shoeboxes, paying [high rents]; they’re progressing through their life cycle and they want more space and homeownership — some can afford it, others can’t,” O’Neil said. “Those demographic trends are helping to push this new asset class in SFRs. It’s new in the sense it’s become institutionalized in terms of the development of larger, 150-plus-unit communities.”
Some of the nation’s largest homebuilders like Lennar and D.R. Horton have been bolstering build-for-rent practices. Earlier this year, Lennar partnered with Centerbridge Partners and Allianz Real Estate, among other institutional players, to launch a $4 billion BFR platform.
“The ease of underwriting and the ease of disposition of assets are the two main things,” Broadmark’s Pyatt said about the appeal of lending on single-family rental construction. “We’re quicker in and out, and they’re less subject to the vagaries of a market; they are easy to replicate; they are easy to put a budget together for.”
Today’s existing stock is outdated and expensive, tied to its respective micro markets, and it can be hard to manage scattered sites. But investors are getting in anyway, partnering with or consolidating with smaller owners of around 100 homes or so, since many institutions don’t have the capability in-house to asset manage scattered site homes.
“We’re working with a private REIT who’s using a few channels to build their portfolio in the BFR space, but also bringing in scattered site portfolios, buying owners out. There will continue to be aggregation, but it will take time,” Berkadia’s Kirkpatrick said about the sheer size of the SFR and BFR housing market. “A lot of these institutions aren’t set up to do it in-house. Many [smaller] scattered-site SFR operators have channels for supply and broker relationships and in-house management, because it can be a management nightmare. Institutions want exposure to both scattered SFR and BFR, but the barriers to entry to scattered-site SFR are that much higher, because to get scale, it’s very organic and slow — so to get in and recapitalize an SFR operator and give them capital to grow, while leveraging their expertise and the operations that they’ve created over time, [is attractive].”
Despite all the flashy activity from institutional-grade players, around 98 percent of the current single-family detached residential market — more than 18 million homes — are currently controlled by smaller investors that have one to 100 homes, according to a September report from John Burns Real Estate Consulting.
McKinney, the small SFR landlord and investor, who has amassed a personal arsenal of more than 70 homes around the Memphis area that he manages himself, falls within that grouping, and he isn’t too keen on what’s happened to the single-family housing market in his stomping grounds.
“I’ve quit buying all together right now,” he said. “Prices are too high and I’m not fighting people to pay for a house — my plate is so full as it is. I’m not chasing it anymore. I’ve got a good base of rental income. I’m in a good place.”
Median sales prices of existing single-family homes in the U.S. climbed 17 percent from January to September, jumping to roughly $359,700 from $308,000, according to data from the Federal Reserve Bank of St. Louis.
McKinney’s market is one of the more institutionally owned markets that exists today, and rents and home prices in Memphis have been climbing, as they have been in most larger Sun Belt cities, according to the September John Burns Real Estate Consulting report. The median home sales price in Memphis in August was $220,000, up from $185,000 a year ago, according to information from the Memphis Area Association of Realtors.
The Memphis-native said he doesn’t think he’ll buy homes in the area again until there’s another crash.
Other single-family investors and developers told CO that they believe supply gains from the increased interest in the BFR space will help tamp down rising home prices, and BFR players said they aren’t too concerned with ongoing supply chain concerns and volatile materials costs, believing they will stabilize.
Given current SFR and BFR market dynamics, as well as banks maintaining relatively strict lending parameters, it’s hard to envision a crash occurring any time soon.
“Now’s the time to be aggressive, putting capital to work in the development of these assets, because I genuinely believe there will be outperformance when this first wave of communities is built, leased up, stabilized and taken to market,” Resmark’s O’Neil said. “We’re seeing it now, but in the next 36 months there will be big transactions, big numbers and that’s going to continue to establish new benchmarks. Land prices and asset prices will continue to move up, but we’ll eventually see an equilibrium.”