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Acquisitions & Dispositions

Maximizing a Challenging 2023 Housing Market

Technology Can Help Those Who are Still Looking to Find Opportunities By Tim Reilly The real estate market has changed dramatically over the last year. With home price appreciation softening market-to-market and inflation running wild, something had to give. Successive increases in mortgage interest rates beginning in the second half 2022 put the brakes on the previous year’s unprecedented homebuying activity as the housing market shifted into a new ‘price discovery phase.’ Consequently, the single-family rental (SFR) and fix/flip investor activity which represented 4-5% of the total purchase market began to slow down as well. According to CoreLogic data, SFR growth has decelerated in the second half of 2022. A Redfin report also confirmed investors are retreating from the purchase market. According to the report, real estate investor purchase activity fell 30% in the third quarter. Rental growth is beginning to soften as well. Based on an analysis of the CoreLogic Single-Family Rent Index, Hunter Housing Economics is forecasting rent prices will decrease slightly across the country in the first half of 2023. It will require investors to fine-tune and consider the drivers of their portfolios more carefully. Looking back on 2021, investor participants enjoyed the macro-benefits of a booming market like all boats rising during the high tide. Now, as a result of the cooling housing market, cap rate and ROI pressure is impacting purchases unevenly throughout differing geographic markets. Persistent inflation coupled with more expensive capital repair costs, have suddenly made acquiring, rehabbing, and pricing a rental or flip property a more challenging puzzle for even the most experienced investor to solve. Welcome to the “new normal.” However, analysts are still favoring the SFR market as demand for rentals is expected to grow. The shortage of affordable homes combined with mortgage rates trending above 7% continues to make purchasing a property difficult for many would-be buyers. According to Realtor.com, the gap between single-family home constructions and household formations grew from 3.84 million homes at the beginning of 2019 to 5.8 million homes as of September 2022. It is a factor driving growth in the SFR market, as well as a shift in sentiment towards renting. A new suburban renter who values the flexibility and ease of renting has emerged from the pandemic and is here to stay. Renting well managed properties can offer a high standard of living without the commitment and expense of owning a home. And the growing trend appears to be transgenerational—from Gen-Z to Millennials and even Baby Boomers opting for the no-maintenance living offered by SFRs. As history teaches, where there is demand there is opportunity. Investors who continue to find opportunities amid the turbulence are more likely to thrive through this slowdown. One thing SFR investors, owners and developers can do to position themselves for success and prepare for the road ahead is put technology and property data to use. The right tech stack and data resources can help stabilize portfolios, maximize a variable operating cost structure while enhancing operational efficiencies, and refine acquisition and/or disposition strategies. Below are some methods for investors to do just that. Finding Acquisition Opportunities As home prices begin to fall in certain metros but continue to appreciate in others, investors have the more difficult task of identifying which opportunities will yield a good return. The latest proptech embedded with artificial intelligence (AI) may be able to help in a number of ways: »          Pinpoint desirable SFR market locations where property values are stable or appreciating. »          Create a personalized buy box with intelligent search functionality to quickly sort through available investments based on specific property characteristics. »          Use computer vision AI to instantly estimate the condition of properties. »          Estimate the cost of repairs and property value after improvements are made to quickly establish potential ROI. Property Maintenance  Single-family renters have higher expectations for the quality of finishings and responsiveness to property issues. To help you get top dollar for your rentals and retain tenants, a platform that includes automated workflow, assignments, and access to a network of qualified contractors can help you streamline your property management operations: »          Scope renovations and repairs to allocate budget and timelines appropriately. »          Access a network of vetted contractors to quickly dispatch a qualified professionalto complete repairs. »          Use AI to compare the condition of your properties to comparables in the same market. Portfolio Management As the market fluctuates, asset managers need flexible technology that allows them to focus on strategy rather than executing the thousands of repetitive tasks required to effectively manage their portfolios. The best asset management technologies leverage automation and task-driven workflows to simplify complex processes, track progress and proactively manage portfolios. This helps users more easily execute and manage their strategies, from acquisition through renovation, listing, management, and disposition in the following ways: »          Customized rental management workflows can help manage specific scenarios for property maintenance. »          Track KPIs to monitor property performance and manage expectations. »          Execute your disposition strategy for properties that are underperforming or in higher risk markets. Onboarding and learning new technology can understandably feel like a daunting exercise. However, adopting a new technology solution may provide the competitive advantage savvy SFR investors are looking for as the market becomes more complex. Working with a provider like homegenius Real Estate that has invested in the latest advancements in automation, machine learning, and data science can help you take a proactive approach based on real-time micro-market data. While others are choosing to “wait and see” how the market performs, you can get ahead of them by optimizing your strategy now. Ultimately, nimble technology is a critical investment for SFR investors and asset managers to successfully navigate the market slowdown.

Single-Family

SFR Emerges from Pandemic

Will Other Factors Impact the Industry in 2022? By Tim Reilly This time last year, I compared the Single-Family Rental (SFR) market to the great Gold Rush of 1849. Supply constriction, low interest rates, rising home and rental prices and strong returns created a highly attractive environment for a growing population of professional investors searching for the same hidden treasure. The “Goldilocks” market conditions triggered in part by the COVID-19 pandemic have turned SFRs into a highly valued and resilient asset class that has proven, once again, it is here to stay. The SFR industry has continued to outperform expectations with unprecedented activity stemming from record number securitizations, new market entrants, and expanding warehouse banking lines. SFR Real Estate Investment Trusts (REITs) have been one of the top-performing real estate sectors throughout the pandemic. But how will continuing lack of supply, increasing rates, and other evolving market dynamics in 2022 impact the industry? And what does the future of the single-family rental look like? Before we get to these questions, let’s start with a high-level overview of the asset class and a deeper dive into its performance in 2021. The SFR Market Grows Up In the wake of the Great Recession, the housing environment was nearly the opposite of how it looks today. Excess supply and nonexistent demand which followed the mortgage market collapse led to plummeting home prices. Some daring and intrepid investors stepped into the breach to purchase foreclosed properties with the intention of rehabbing and renting them before reselling the homes when the market recovered. The unintended consequence caused by these investors’ actions resulted in the stabilization of home prices in an otherwise rapidly depreciating housing market. They were buyers when everyone else had soured on the national housing market. As home prices began to rebound, many of these investors continued to lease the properties to consumers who were looking for long term, stable suburban rental opportunities managed by professional property owners. The new owners found that the cash flow, historically low interest rates, and steady price appreciation were a profitable recipe. The business model’s early success attracted the attention of more capital markets participants and more large institutional investors who could aggregate large numbers of rental properties. The win-win recipe for consumers, owners and capital market participants ignited the new single-family rental asset class. At the onset of the COVID-19 pandemic, there was widespread concern that the SFR market would suffer as unemployment could lead to rental delinquencies. Yet, in reality, the SFR market experienced an unprecedented boom. The pandemic created a heightened demand for more square footage, less urban density, and privacy for the new “work-from-home” environment. The new combination of factors drove more renters to less dense, more spacious single-family homes outside of cities. And as commercial real estate and hospitality investments looked uncertain, institutional investors looked to more stable investments in residential real estate. The Wall Street Journal reported there was more than $150 billion of private-equity real estate cash looking for a stable investment haven in 2020—and many fund managers turned to SFRs. Even record-low housing supply challenges that escalated throughout the pandemic did not slow the momentum in the SFR market. The SFR industry continued to creatively adapt to the low housing supply by offering new Build-to-Rent (BTR) communities. In fact, BTR housing became the fastest growing sector of the housing market, with more than 44,000 rental homes built in 2020 and 51,000 built in 2021, according to the National Association of Home Builders. According to the Single-Family Rental Survey conducted by JBREC/NRHC, 26% of portfolio growth for SFR operators came from BTR homes, rising from 11% in 2020 and up sharply from just 3% in 2019. Professionally managed BTR communities with amenities like pools, fitness centers, playgrounds and walking trails provide a lifestyle that appeals to a wide variety of renters from Baby Boomers to Gen-Z. Without a doubt, 2021 was the best year ever for SFR capital markets and its participants. A record number 29 SFR securitizations closed in 2021, far outpacing the 14 securitizations closed in 2020. Smart money was on the SFR industry as the JBREC/NRHC Single-Family Rental Survey reported that single-family rents rose 9% year-over year in the fourth quarter 2021. Single-family homes built to rent are delivering strong returns to investors as well—in November 2021 The Wall Street Journal reported the average risk-adjusted annual return for built-to-rent investments reached 8%. The SFR industry continued its evolution as the asset class offered many more varieties on the home rental concept for both consumers and investors alike. Not only is BTR a new twist on the rental space, but rent-to-buy has also reemerged as another investment vehicle in 2021. The year was not short on new mergers and acquisition activity, joint ventures, and entrants into the vibrant market. At this point SFRs have proven to be a resilient investment, run by forward-thinking creative minds and emerging from the pandemic as the number one asset class. Following the “Best Year Ever” While the growth seen in 2021 will be hard to top, the SFR market is poised for healthy growth in 2022 and beyond. According to PwC and the Urban Land Institute’s Emerging Trends in Real Estate 2022 report, single-family homes rank number one in both investment and development prospects. There is still untapped potential and room for the industry to grow. While there has been concentrated growth in certain metros, especially within the Sunbelt states, the share of SFRs owned by institutional investors is only about 1% of the national housing supply. Investors have begun to open up professionally managed rental opportunities in secondary and tertiary markets outside of the original and primary “Sand States” purchase footprint. Both economic factors and shifting consumer preferences are converging to drive and sustain demand for professionally managed SFR homes. Those economic factors include record high housing prices and increasing mortgage rates that make renting more affordable compared to buying. According to the Radian Home Price Index, provided by Radian’s

Single-Family

Prospecting Is Getting Harder in the SFR Gold Rush

Use Smart Technology to Strike Gold by Tim Reilly A confluence of forces has turned the market for single-family rental (SFR) properties into something resembling a gold rush. As buyers, speculators and institutional investors lean into the market in search for real estate value, the odds of finding an overlooked nugget in the gold mine are decreasing. Timing is the key, and smart buyers who are prepared to act quickly are using the latest tools to find and analyze new properties as soon as they hit the market.    Soaring Home Values Create Opportunity for SFR Investors Despite the global pandemic and the economic dislocation it triggered, the national real estate market is showing unprecedented strength due, in large part, to a continued supply and demand imbalance. According to a recent Freddie Mac housing analysis, the housing stock is about 4 million single-family homes short to meet the national demand. And, as a direct result of the imbalance, home prices nationally appreciated at an annualized rate of 9.3% in the second half of 2020, according to the Radian Home Price Index. Across the country, states set records in nearly all transactional categories, including 47 states reporting the highest average sales price on record, and 31 states reporting historically low days on market to sale. Although a housing stock shortage is the linchpin underlying the lack of supply, a host of pandemic-related factors have been fueling the housing demand. Historically low interest rates, shifting preferences for suburban housing, and COVID-related household consolidation have acted like gasoline on a lit fire. As the pandemic forced millions of Americans to lock down and work remotely, demand surged for bigger houses away from crowded urban areas.  And, as more people were priced out or frightened away from the competitive purchase market, the demand for single-family rentals exploded. According to the Census Bureau, occupancy rates across single-family rentals averaged over 95% in the second half of 2020—the highest in nearly 40 years. The surge in demand also translated to gains in rental rates. Morningstar reported annualized rent growth on vacant-to-occupied properties rose to a high of 7.5% in October 2020. These trends indicate strong, stable investment for SFR owners who are able to get their hands on properties. A Gold Rush for SFR Properties SFR homes make up only 11.7% of total national housing stock, according to John Burns Consulting, representing about 16.4 million properties out of a much larger 150 million plus single-family home universe. Most of the rental properties are owned by individuals, known as “mom and pop” landlords, who own a handful of properties each. And further, institutional SFR owners, both large and small, make up just a fraction of the overall SFR market representing about 220,000 properties. Therefore, the larger US housing market is ripe to be “mined” and aggregated by SFR investors.   Meanwhile, as commercial property investments have taken a negative turn due to pandemic pressures, there is a huge amount of money sitting on the sidelines looking for an attractive real estate investment. The Wall Street Journal reported late last year that there is more than $150 billion of private-equity real estate cash looking for a stable investment haven. With traditional hotel and office holdings in limbo, those firms are now looking closely at SFR properties. Perfect market conditions—supply constriction, low rates, rising home prices and rising rents coupled with smart money looking for strong returns—are creating a single-family housing gold rush comparable to the fervor of California in 1849. The challenge for the property prospectors is finding the perfect nugget with increased competition from other investors and homebuyers all looking for the same hidden treasure. Using Technology to Intelligently Mine Leads Investors who leverage smart technology coupled with analytics have a better chance of striking gold before the competition. Those investors still relying on manual searches and outdated technology might as well be panning by hand in the rushing stream. SFR investors need to deploy cutting edge technology and nimble strategy to find their nuggets of gold.  Some of the tips and techniques to help the SFR investor community include: Customize your buy box filters to identify your ideal investment criteria. Fuel your analytics with market data and related inputs to estimate rental market health and home price appreciation. Trigger real time alerts when properties that fit your investment profile hit the market so you can act immediately. Use interactive, geo-fenced automated valuation tools to assist you with nimble, accurate, and quick decisioning. Make informed decisions through a customized workflow that allows you to change your requirements as the market fluctuates by deploying and utilizing a property management/buy platform. Leverage an automated pricing engine and incorporate trending analytics to help you estimate sales prices or rental values. If you have not yet optimized your tech stack for property acquisition, you may be losing out on opportunity to build your rental portfolio. Finding the right technology partner will maximize your chances of success in the red hot SFR housing market. Combining better analytics and management tools with a unified technology-driven acquisition platform will augment your buying strategy and increase your ability to strike gold.

Single-Family

Single Family Rentals Have Come Into Their Own

What opportunities lie ahead? For the real estate market, the pandemic has revealed underlying weaknesses in some otherwise dependable investments and surprising strength in others. The single-family rental (SFR) market, in particular, has proven to be exceptionally resilient. Cautious Optimism in April As the COVID-19 crisis dawned, industry participants were cautiously optimistic during their first quarter earnings calls. Rent collections in March were better than many had expected, with April trending positively, in some cases north of 95% of originally scheduled rent collected. By May, consensus was that the market was buoyed by the unusual circumstances. With much of the country under lockdowns and “stay-at-home” orders, people were looking for socially distant alternatives to apartment living.Others needed more space so they could work from home. Like any industry, the SFR market was braced for short-term pain, but these and other factors were enabling the SFR market to withstand the COVID-19 headwinds. The question remained, “Would it last?”  Today, the answer is an overwhelming “yes.” Applications for rental leases are continuing to break year-over-year internal records, and rent collections are even stronger now than they were at the outset of the pandemic. Clearly, there must have been something right about these rental properties because people are continuing to seek them out. And investors are taking notice. Since the beginning of the year, there have been six new SFR securitizations, four of which have closed or come to market with industry acceptance since the beginning of the COVID-19 crisis. In an uncertain world, SFRs appear to be a haven in the real estate market. More importantly, SFRs have proven their resiliency to become a stable and mature asset class suitable for long-term investors. Why the Continued Boom? The strength of the market cannot be attributed solely to public sector action in the wake of the pandemic. In April, there were no checks from the government or protection for renters from eviction. Instead, SFRs have been benefiting from a persistent imbalance between the stagnant supply and mounting demand for homes. Despite the recent spike in unemployment due to the pandemic, the job market, in the wake of the 2008 great financial crisis grew to levels that had outstripped new housing starts. In 2019, there were 2.1 million new jobs created in the country and only 1.2 million new homes built. At the same time, according to Gary Berman of Tricon Residential, “the pandemic is driving people to prioritize health and working from home, preferably in the suburbs.” Invitation Homes did just that and found that about 30% of survey respondents who moved into homes in April and May did so from denser urban areas, and approximately 30% said COVID-19 increased their desire to live in a single-family home versus an apartment or a town home.  SFRs Are an Asset Class The strength and resilience of the market is making investors reconsider SFRs, not as a lucrative trade, but as a safe and rapidly maturing asset class in its own right. And because the SFR market has weathered the pandemic stress test better than nearly every other real estate asset class, it makes sense that money in search of safety and long-term potential is now flowing in. Part of the maturing process is that institutional owners have become highly effective landlords and property managers. The money that has been flowing into the market has been put to good use to build the sophisticated back office infrastructure necessary to manage hundreds and thousands of properties across multiple geographies. Tenants are taking notice. They appreciate that with an institutional landlord they should expect repairs to be made quickly and professionally, spaces will be clean and decontaminated of COVID-19, and there is far less chance the owners will go bankrupt.  As a result, large institutional owners are getting larger. Invitation Homes now manages upward of 85,000 properties. Another major SFR market player has said its ambition is to manage a half million homes. And why not?   As massive as that figure is, it’s not as eye-popping as it seemed even last year. After all, with 17 million rental properties available in the U.S., and the market growing with strong tailwinds, it’s not unreasonable to imagine an institution with 1 million or even 2 million properties under management. There is nothing holding the market back, and it seems the only thing that could trip up the big players in the market is a misstep of their own making.  Long Past the Financial Crisis The world is a very different place now than it was during the financial crisis of 2008. Then, the housing market collapsed under the weight of massive oversupply anda drought of credit. Savvy and courageous investors stepped into this unforgiving landscape and bought properties with the hope that the market would one day clear. By the time Invitation Homes was founded in 2013 plenty of opportunities to buy overlooked properties remained. In fact, companies like Invitation Homes and others were instrumental in stabilizing the housing market and making it strong enough to withstand another 2008 downturn. Five months into the COVID-19 crisis, we have not experienced the equivalent real estate catastrophe that followed the 2008 financial crisis; however, there are some clouds on the horizon. For instance, what happens when the Federal Housing Finance Agency (FHFA) foreclosure and eviction moratorium expires? Could that spark a cascading crisis as in 2008?  Thanks to the strength of the SFR market, there is now a powerful institutional backstop and plenty of new knowledge and capability available to buy, rehab and rent distressed properties. Where Do We Go from Here? If there was any overlooked value left in the market at the beginning of 2020, the COVID-19 crisis has cleared it and then some, leaving the industry at an interesting inflection point. It’s become a difficult time to be a buyer. The players who built this industry with an aggressive buy strategy now face a challenge of deciding which markets, if any, are the right places to buy

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