Utilize Modular-Built Assets for Higher Returns
Modular Housing is Gearing Up to be the Future of Real Estate
By Amy Martinson
Institutional investors play a critical role in the real estate market, constantly seeking innovative strategies to maximize returns in a market that is marked by complexity and rapid change. The United States real estate market, in particular, presents a complex tapestry of contradictions that demand a fresh perspective and novel approaches.
On one hand, residential single-family properties are experiencing a remarkable surge in valuation, as confirmed by recent data from the S&P CoreLogic Case-Shiller Home Price Index. This index meticulously monitors fluctuations in the value of residential real estate on a national scale, and its findings reveal the significant increase in home values.
This rise in valuation has naturally piqued the interest of investors, especially institutional ones, who are always on the lookout for opportunities to capitalize on market trends.
However, on the flip side of this coin, the behavior of Wall Street paints a different picture. Prominent Real Estate Investment Trusts (REITs), which have traditionally been buyers in the real estate market, are increasingly becoming sellers. This shift in strategy by the corporate giants in the real estate world underscores a growing sentiment: building new homes seems more advantageous than buying existing ones. The proof is in the numbers; U.S. single-family housing REITs are trading at a 20% discount to their gross asset value, making this an opportunity too crucial to overlook.
So, what are the potential resolutions for institutional investors in this evolving landscape? Let’s take a deep dive into the options available.
Navigating Real Estate Investment in Changing Times
The traditional approaches to real estate investment are undergoing rapid changes, driven by pressing challenges and evolving financial conditions. One alarming statistic that underscores the urgency for change is the fact that monthly mortgage costs now consume a significant 42% of the U.S. median household income. This calls for an immediate paradigm shift in how we approach real estate investing. These challenges compel us to explore alternative avenues, including innovative financial models such as modular bridge financing, and consider building rather than buying.
Addressing the Housing Crisis
Adding complexity to the financial landscape is the ongoing housing crisis in the United States. According to Fannie Mae, the overall housing stock falls significantly below what long-run demographic trends suggest is needed. Their estimates indicate a cumulative shortage of approximately 4.4 million housing units across the country’s top 75 metropolitan areas. Policy group Up for Growth offers a similar assessment, pegging the shortfall at around 3.8 million units. David Howard, CEO at the National Rental Home Council (NRHC), also emphasizes the urgency of this housing shortage, which spans all housing types.
Shifting Focus: Building vs. Acquiring
Dallas Tanner, the CEO of Invitation Homes Inc., which manages a substantial portfolio of over 83,000 homes for lease, sheds light on the changing landscape of SFR investments. He notes that the focus has shifted away from primarily acquiring existing housing stock towards the development of new homes.
Tanner reveals that over the past five years, Invitation Homes has acquired slightly over 12,000 homes while divesting nearly 10,000 homes. Notably, the company is actively engaged in development activities, with the number of homes in its development pipeline growing significantly.
Embracing a New Strategy: Build-for-Rent (BFR)
Large corporate landlords are adapting to the changing landscape, opting to build rental homes rather than acquiring existing ones. This shift aligns with the rise of the Build-for-Rent (BFR) model, especially in high-demand states like Texas and California. Despite challenges like high borrowing costs, BFR communities are expanding their appeal beyond seniors and are attracting a wider demographic, including young families.
Navigating Market Dynamics
The aftermath of the pandemic has ushered in remarkable shifts in the real estate sector. Factors like inflated currencies leading to higher interest rates and a significant property inventory shortage have created a volatile market. However, despite these challenges, the sector remains dynamic. Reports from organizations like the California Association of Realtors indicate sustained interest from potential buyers, hinting at an active market.
Modular Bridge Financing
In this evolving marketplace, modular housing stands out as a viable solution, offering substantial benefits like affordability, speed, and sustainability. Several compelling financial metrics validate the investment potential of these homes, including around 20% cost savings on construction compared to traditional homes, and eligibility for tax credits due to eco-friendly construction methods. Additionally, the quick return on investment and immediate occupancy make modular homes a lucrative investment opportunity.
What Makes Modular Housing Enticing?
Cost Efficiency // One of the most significant advantages of modular housing is its cost efficiency. Compared to traditional construction methods, modular homes can offer substantial savings, up to 20% or more on construction costs. For institutional investors, this translates into a lower upfront investment and the potential for quicker returns.
Speed of Construction // Modular homes are known for their rapid construction. Factory-built modules can be produced simultaneously while site preparation is underway, significantly reducing construction timelines.
Sustainability // In an era marked by increasing environmental consciousness, modular housing is emerging as an environmentally friendly option. Many modular homes are built using sustainable materials, and their construction processes generate less waste compared to traditional construction.
Tax Incentives // Modular construction often qualifies for tax incentives due to its eco-friendly construction methods.
Reduced Labor Dependency // Modular construction relies less on skilled labor compared to traditional construction methods, thus reducing the dependence on scarce labor resources.
Market Growth // The expected growth from $32.49 billion in 2023 to $40.70 billion by 2028 represents not just a numerical increase but a testament to the growing recognition of modular housing’s potential.
The Bottom Line
Modular housing is proving to be more than just an alternative; it is gearing up to be the future of real estate. With its numerous advantages, it offers solutions to many of the current housing challenges. However, realizing the full potential of modular housing requires a collective effort from government agencies, investors, and homebuyers alike.
