Additional Investors Flock to Single Family Rental
Will diligence standards degrade based on competition and lack of inventory?
by Jennifer McGuinness
Currently, there are approximately 49 million rental units occupied in the United States of which, approximately 12 million are Single Family detached rental homes and 2.8 million are leased townhomes. Most of these units are existing homes on scattered lots versus new construction.
To date, over 5 million homes have been converted from owner occupied properties to rentals. Based on this approximate 17 million units and their performance, there continues to be significant investor interest in the sector. Today, the market presents fundamentals that could lead investors to be uncertain about how investments could perform, but even in a time of uncertainty, Single Family Rental Investors continue to report record occupancy levels and rental growth. DBRS Morningstar recently reported that that rents in institutionally owned single-family rentals have grown more than 3% (annualized) in 2020. Invitation Homes as an example, reported renewal rent growth for pre-existing tenants to be up 3.3% in the second quarter of 2020 and new tenant lease growth up 5.5% in the same timeframe. Another driver of investor interest has been the Single-Family Rental REITS (Real Estate Investment Trusts), as they generally outperformed the broader REIT Market in 2020 by 23%, thus exceeding other real estate sectors by significant margins (i.e., exceeding multi-housing by 9%, office by 22% and shopping centers by 33%).
Additional Investors and New Capital
Away from occupancy and rent growth, the COVID pandemic and the subsequent stay-at-home orders have forced many to work from home and educate their children from home; hence, individuals and families are seeking more space. The two largest Single Family Rental Investment Trusts, Invitation Homes and American Homes 4 Rent, own a combined 135,000 units, which makes up less than 2% of the total units. According to Amherst Capital Management, there are more than 25 institutional landlords in the space today. Even historical investors like Blackstone, who sold off their remaining interest in Invitation Homes last year to JP Morgan Asset Management, have remained invested in the sector in some capacity, e.g., they still hold a minority stake in Tricon Residential.
Additional capital has been raised and acquisitions have been made that indicate the investor appetite is strong in this sector. Examples of recent announcements include, a $375MM joint venture between Rockpoint Group and Invitation Homes, a $625MM joint venture between JP Morgan Asset Management and American Homes 4 Rent, and a $300MM fund raised by Brookfield Management, amongst others. On the acquisition front, Front Yard was initially to be acquired by Amherst Holdings for $2.3B but the parties terminated this agreement in May of 2020, opting instead for an equity investment by Amherst of 4.4MM shares of common stock, at the initial offering price of $12.50 ($55MM invested). They also provided a $20MM committed two year unsecured and committed financing facility to the company. Fast forward to October 2020, just 5 months later, when Pretium and Ares Management Corp. partnered to acquire Front Yard for $2.4B and initially for $13.50 a share but later revised this to $2.5B and $16.25 per share to its investors (a 63% premium over Front Yards closing share price). This acquisition just closed.
Supply and Demand
The big questions in my mind and I am sure many market participants are:
- Is there enough supply for the investment demand in this sector?
- When looking at the capital raised, if there is not enough supply, will the investment managers have to become too aggressive in their acquisition strategies to be able deploy their capital?
- If this should occur, does this mean that the due diligence of the properties (and/or of the tenants that reside in them) could be “relaxed” to be competitive and thus increase the risk profile of the investments driving a change in the stable cash flow curve the sector has historically experienced? And, if so, could this adjust the potential of continued capital appreciation that many investors are betting on today?
When looking at the market today, the biggest challenge I see initially is that demand does outweigh supply if you are solely looking at “for sale” real estate and mortgage rates. For example, the National Association of Realtors (“NAR”) reported that as of October of 2020, homes for sale were down 20% from October of 2019. It is important to note, however, that generally unsold inventory is on the market for 2.5 months whereas it was 3.9 months a year ago.
Homebuyers are also “paying up” for real estate and there are many renters in cities seeking more space and now looking to live in the suburbs, due to both COVID and the fact that they are now at the age to acquire homes. The demand of the homebuyer, coupled with the demand of the Institutional investor, continues to drive home prices up in many markets. A good example is California, where NAR reports that the average price of a home increased more then 15% from 2019 to 2020.
This, hand in hand with record low mortgage rates, has well positioned home buyers to make better purchase offers which could result in lower investment returns for investors, should they have to increase “buy prices” to acquire additional real estate. What the market is not looking at as closely however, is how many of the homebuilders have now either entered joint ventures with investors to “build for rent” communities or have started rental community divisions of their own.
Single Family housing starts have increased by over $1.2 million in November per the Census Bureau which is more then a 25% increase from 2019. We have not seen this number of housing starts since before the financial crisis. While a lot of the new construction will go to owner occupants, this significant addition of new homes will begin to equalize the lack of supply for investors. Also, with the release of the COVD vaccine, if the country begins to truly open again, we believe we will see a rise in listings, as today we believe they are at record lows in part based upon people not wanting others walking through the homes due to the risk of contracting COVID and the fact that the government has instituted both eviction and foreclosure moratoriums.
Our Expert Assessment
The government moratoriums have allowed even those parties who are unable to make their mortgage or rental payments to remain in their homes rather than sell them or be evicted. On President Biden’s first day in office, he signed an order asking federal agencies to extend both the eviction and foreclosure moratorium through March 31st, 2021 (they were initially to expire on January 31st). Upon expiration of these “stays”, we should see an “uptick” in listings as well.
Since home prices are strong and generally in high rental markets are beginning to peak (thus increasing the value of the investor current property holdings and new construction starts are continuing to increase significantly), we believe that although there will initially be more demand than supply, that this should equalize as we move through 2021. It will also bring better rental opportunities to areas that may not be a focus today. If this occurs and the investors are a little patient with their capital in the earlier part of the year, we do not believe we will see significant increased risk in the single-family rental investment sector nor a decline in diligence.
