Denice R. Preston
Wall Street has its eye on the rental market for single-family homes. A combination of rising prices for homes, changing preferences for renting, and the advancement of technology is driving the growth.
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Hudson is a finance professional with a decade of expertise in organizing and investing in single-family housing funds. He has been an equity analyst for hedge funds, a portfolio manager, and a startup advisor. He also is an expert in forecasting and financial modeling.
Before 2010, the single-family rental market was mostly neglected by institutional investors who preferred multifamily properties that were easy to scale. Since the financial crisis, and particularly since 2019, that has changed. Financial heavyweights such as J.P. Morgan Asset Management, Blackstone, and Goldman Sachs Asset Management have contributed to financing an industry comprising around two dozen one-family house rental firms, which are snapping the properties they already have and creating new ones.
The value of residential real estate owned by institutions or companies increased to 90,215 houses in the 3rd quarter of 2021 because big and small investors contributed 18% of single-family home sales. According to the real estate company online Redfin, this is up 80.2 percent from the year before. Three-quarters of all residential purchases by investors were single-family houses, and multifamily homes — a market where investors have been a significant player for a long time–accounted for only one-quarter of sales.
The Birth of a New Investment Class
The trend towards single-family homes started as an arbitrage opportunity following the financial meltdown 2008 but has since evolved into something more durable. The downturn in the real estate market has reduced the perceived risk associated with single-family homes regarding the returns. Currently, real estate investment trusts, private equity firms, insurance companies, and pension funds see rentals, which have been spared the repercussions of lockdowns caused by pandemics on shops and offices, as a reasonably high-yielding security from inflation.
I saw the initial chance live. The year 2010 was the first time I assisted in establishing a fund that purchased some hundred foreclosure single-family houses in Atlanta at prices ranging from $50,000 to $60,000 and then put up as much as $10,000 for improvements to each home before leasing them out. With quick actions, we achieved double-digit returns even at the end of the cycle when values returned to average. There were no evictions, and we completed the sale of the last houses in 2020.
Investors from institutions did similar, investing money into markets in turmoil and reaping massive gains before recognizing they could make single-family rentals a permanent component in their portfolios. 2012 saw Blackstone, one of the most prominent alternative asset management companies, buy Invitation Homes, which controls more than 80,000 rentals. Blackstone has repaid the loan in the year 2019 following Invitation Homes went public. By 2021 Blackstone purchased Home Partners of America, a firm with more than 17,000 rent-to-own units throughout the US for $6 billion.
How Tech Is Boosting the Single-family Rental Market
Wall Street is not new to the real estate industry. Rental properties for multifamily have always been regarded as a critical portfolio investment by large-scale investors, and other scalable commercial properties, such as retail, office, and industrial structures. These properties can all absorb the substantial capital costs the firms make to purchase these properties. Single-family rentals were historically classified as non-core and often grouped with specialties like medical offices, data centers, hotels, and senior housing because they were harder to expand. Because of the advancements in technology, this is no longer the case.
The property technology industry is evolving more than single-family rentals, but its effects in this particular sector are particularly significant. In contrast, the due diligence process for multifamily homes is, by definition, already scaled; single-family properties are more individual, making acquiring buyers more expensive per unit. What’s shifting has been that the investors have begun using big data technologies, which allows them to filter diligence data much faster and make markets that are otherwise splintered more effective and accessible.
The firm Entera-which is supported by Goldman Sachs uses technology to analyze property records and other data to aid investors in quickly identifying properties that meet their purchasing criteria. They also help them determine the most appropriate bids. These capabilities allow institutions to provide more precise returns forecasts for their models and increase the size of their real estate holdings.
The changes extend to single-family portfolios, with many landlords utilizing fully digital connections with tenants to handle everything from maintenance requests to payments requests to cut costs, increase tenant satisfaction and boost expansion, according to Hoya Capital. This means landlords can earn net operating margins nearly as high as Multifamily Real Estate Investment Trusts Hoya Capital says.
“We use technology in every aspect of our business, everything from acquisition all the way through maintenance and into the call center to improve our operating metrics and offer residents a much better experience,” Tricon Residential’s chief executive officer Gary Berman told the financial news website Seeking Alpha in October 2021. Tricon Residential manages 33,000 properties across North America.
Wall Street’s Real Estate Market Impact
The extent to which the Wall Street-backed companies will have remains to be determined. They are currently just 2 percent of the residential market, per analysts at brokerage firm Amherst Pierpont, which specializes in fixed-income capital markets. There are some restrictions built into this category. Single-family rental businesses tend to concentrate mainly on regions growing faster in the Western, Southwestern, and Southeastern states, purchasing and building homes aimed at primarily middle- and upper-middle-class families. The supply of homes is also a problem, and investors’ attention has been shifting increasingly toward building-to-rent.
Yet, acquisitions by investors are accelerating. The realization that due diligence initiatives could be of a larger scale has not only resulted in the entrance of numerous financial institutions to the market, but it has also resulted in record levels of debt backed by single-family rentals and boosting liquidity for institution financing by spreading the risk. The public issuance of what’s known as SFR debt topped an all-time high of $43 billion in 2021, according to the report of Amherst Pierpont.
Although SFR security transactions have steadily increased over time, they’ve lately been able to increase significantly since the advent of big data, and automated processes have made the process of vetting and managing these properties much more accessible.
In addition to reducing diligence fees, many other factors have made SFR deals appealing to lenders. Collateral value is a crucial element of any securitization model Single-family securitizations are, in the end, secured by the value of the home that is increasing due to the growing demand from renters to own homes.
In light of all the above In light of these, I anticipate SFR securitizations to grow faster. 2021 was the very first period of this particular spike in securitizations. The performance is excellent and trading in line with other types of structured debt. Wall Street is eager to make as many securitizations as investors can handle, and the demand is a lot right now as rents are increasing. Investors anticipate that interest rates and risk will remain shortly at an all-time low.
