Six Data & Analytics Predictions for SFR in 2022
Most of the Biggest Changes Remain Impossible to Predict
By Sean Begley
Single-family rental continues its streak as one of the nation’s hottest asset classes. Demand for single-family rental homes continues unabated and capital flows into the market are showing no signs of easing. At CAPE Analytics, our team works with a number of real estate investors to provide remote property intelligence, and we have a distinct view into how the industry is evolving—especially in how organizations are leveraging technology to support their decision-making and operations.
As we near the end of 2021 and look forward to 2022, there are several ways we see the industry changing in the coming year. As with many industries, the players with the right operations, technology, and predictive data sources are likely to come out on top.
Let’s get into some of our predictions…
Prediction 1: More volume means buyers will be increasingly reliant on analytics to run due diligence and manage portfolios
According to CNBC, “In the past year, there were roughly 43 announcements totaling more than $30 billion in capital targeting U.S. rental housing.” With some of the biggest players planning to purchase tens of thousands of homes in the coming months, and new shops opening up seemingly every day, it is critical that investors rely upon high-quality property information and analytics to make decisions. Analytics platforms that are regularly refreshed and can combine data sources into a singular view will see increased adoption.
While initially used to help decide which properties to target and set purchase prices, rising volumes will dictate the use of advanced analytics for property management as well. Those organizations that can manage properties without relying on an army of (expensive) people, will see more profitable operations.
Prediction 2: More competition in the best markets means a bigger buy box… and more risk
Competition is the mother of innovation, and due to a limited supply of homes and ever-growing demand, competition will only increase. To cope, more large-scale investors will rely on a sophisticated waterfall of property and geospatial data to optimize their incoming lead lists and adjust their internal home price and rental models to make the best investment decisions. They will need to make investments within a larger buy box while maximizing returns and maintaining the desired risk profile.
In addition, speed will be of the essence. Coming up with a sticky offer—quickly—will be important in the ability to win bids… having pricing models that understand the nuances of specific properties also helps avoid gumming up the acquisition pipeline with properties that should never have been considered in the first place due to condition and or negative location factors. This need for speed will push more buyers into using automated approaches. Those that widen their buy box and push to be aggressive without incorporating the latest in analytics will end up lowering their returns and increasing their risk.
Prediction 3: The lines between iBuyers and SFR firms will continue to blur
Today, SFR players rely on iBuyers as a channel to enhance their volumes—iBuyers excel at pulling in off-market leads, which are otherwise challenging to identify. And SFR investors are a channel for iBuyers to offload their inventory. So, if volumes continue to grow, iBuyers and SFRs will only become more reliant on each other. In which case it would not be unexpected to see iBuyers and institutional SFR buyers integrate further.
However, there may be some challenges ahead: some large iBuyers may want to create their own SFR operations to create cash flow from existing inventory. Or, if more iBuyers start to freeze their operations in the face of a choppier market — like Zillow did in October—SFR firms may no longer be able to rely on these players to reach their required volumes and increase their own off-market capabilities
Prediction 4: A softening market will test buyers
As Warren Buffet said, “It’s only when the tide goes out that you learn who has been swimming naked.” The adage also pertains to the SFR market which, having been born out of the great recession, has not had to weather a true bear market since inception.
Just in the last month, we have seen a widening spread in HPA forecasts for the coming year, with some stakeholders predicting 2% nationally and others sticking to a bullish 15% estimate. The volatility in these predictions could signal that we will soon see a softening market in 2022. If and when the market softens, organizations will not be able to hide behind the extra home liquidity and wider margin for error that comes from rising home prices.
Volatile markets generally separate the buyers with strong fundamentals and those taking on excessive risk. It also means that investors will have to get more discerning about their investments and start to take secondary factors like property condition and location into account.
Prediction 5: More distressed properties will be coming onto the market
SFR as an asset class was born in response to the Great Recession and was largely built to deal with larger bulk volumes. That regular volume had turned into a trickle given the strong housing and lending market—then completely dried up due to the pandemic. Now, with federal measures expiring, everyone is expecting some return of distressed volumes, and competition will be stiff. But many of the newer market entrants have not had to deal with distressed properties and larger bulk acquisitions. Distress increases the likelihood of negative property conditions and decreases the certainty of home value estimations—for both automated models and human-derived values. There can also be complicated neighborhood and comparable sales-related issues in areas where distress is concentrated.
From our own research at CAPE, we know that condition issues can increase rehab or maintenance costs by as much as 250%. Data and analytics solutions that can help investors quickly understand the condition of distressed properties and more accurately predict value will be extremely useful as this volume comes back.
Prediction 6: M&A is coming…
Like many industries, there are natural economies of scale in the single-family rental market. Investors can find significant upside by increasing volume and building vertically integrated solutions that merge human capital with higher-order analytics. With that in mind, we believe there will be an increase in merger activity in 2022 that will create some differentiated operations in the market. These acquisitions will appear in two primary flavors: typical acquisitions that scale existing approaches (like Pretium acquiring Front Yard Residential), as well as technological consolidation (where fragmented investors use key providers like Mynd or Renter’s Warehouse to quickly access broader markets).
These acquisitions could snowball into a handful of the large players using their newfound profitability and access to cheaper capital to build a tremendous moat. In the midst of these goliaths, smaller players can continue to win by knowing their chosen markets inside and out and using that knowledge to their advantage.
Overall, we see the importance of next-generation property data and analytics becoming increasingly vital to a space that is rapidly growing in volume, complexity, and risk. This will continue to be an exciting industry to be involved with as it expands—with most of the biggest changes and development remaining impossible to predict.
