Are High Prices and Low Inventory Changing the SFR Market?
by Rebecca Smith
It is fair to say that never has a New Year been so anticipated or so welcomed. 2020 was unprecedented and challenging for almost everyone. The coronavirus threatened the health of millions of people and economies around the world. In our industry, the market for single family rentals (SFR) was buffeted by changing preferences and grim market realities.
That did not put a halt on activity. On the contrary, low rates and available liquidity meant a very active year in SFRs for owners and lenders alike. Not only did the market see a record-breaking number of securitizations completed during the year, but it also saw the largest securitization ever to come to market—more than 14,000 assets—successfully close in 2020.
REIT Performance
SFR Real Estate Investment Trusts (REITs) have been one of the top-performing real estate sectors throughout the pandemic. This was due to several merging factors and secular trends, including the migration of the millennial generation, the largest age cohort in American history, out of cities.
These factors are putting enormous pressure on the market and changing the way some industry players are pursuing acquisitions in what looks to be a period of dwindling opportunities.
Across the country, inventories are low, and prices are high, as existing homeowners stay put to ride out the pandemic and urban renters move to the suburbs to rent or purchase homes themselves. Adding to the pressure, U.S. private equity real estate funds are sitting on more than $150 billion of unspent cash according to Green Street, a real estate advisory firm, as reported in The Wall Street Journal. With core holdings such as hotels and office buildings having uncertain prospects, fund managers are increasingly looking to single-family homes for growth.
The Operators
So, how are these pressures affecting operators? Some are changing up their buy boxes and exploring new markets.
The challenge of acquiring in the current market remains in terms of increased prices and low inventory. However, “self-made” challenges to growth strategies are adding to the pressure. With the eagerness to securitize at the current rates, many of the larger aggregators have exhausted their current inventory which has also led to a scramble to acquire new inventory in bulk through M&A activity.
With so much money chasing limited SFR opportunities, something needs to give. We are seeing that play out among mid-sized operators. Because of a severe lack of inventory, these industry players are turning to each other for growth to increase acquisitions, grow portfolios, and eventually securitize.
In October, for example, real estate manager Pretium Partners LLC and Ares Management announced a $2.4 billion investment to acquire and take private Front Yard Residential Corp. In other cases, mid-size operators are leaning heavily on portfolio acquisitions from smaller operators and competitors to achieve their growth targets.
Some of the larger institutional players are overcoming the inventory shortage by creating it themselves. In the Las Vegas area, one of the biggest landlords, American Homes 4 Rent, built two rental projects totaling more than 65 houses in 2020 and is planning more this year. And that follows a similar pattern of build to rent properties across the country.
The industry is watching closely to see what happens to available inventories when COVID-related foreclosure and eviction moratoriums are lifted as expected early this year. However, with more homeowners having greater equity after a year of explosive appreciation and the sheer volume of forbearances in effect, the potential for further market gyrations is unknown.
Regardless of what happens this year, 2020 marked the maturation of single-family rentals into a recognized and highly valued asset class. That may be the one constant in a highly dynamic market.
