Rising inflation and increasing interest rates have started to dampen the for-sale housing market, pushing the already strong demand for single-family rentals to new highs. For example, Tricon Residential receives a staggering 13,000 weekly phone calls for the 200 to 300 homes that it has available for rent every week.
An increasing number of players—from Invitation Homes to American Homes 4 Rent to institutional ones—have taken note of the opportunities this industry has to offer and formed joint ventures with homebuilders to launch SFR platforms. This strategy attracted sovereign wealth funds into partnerships to provide capital to launch these platforms or enter the development race as well. Companies such as Blackstone and Invitation Homes also took advantage of the previous economic crisis and bought foreclosed home portfolios from banks across the country. Today, they continue to grow their single-family rentals platforms as aggressive buyers in the marketplace.
Al Otero, portfolio manager at Armada ETF Advisors and at Home Appreciation U.S. REIT ETF, offered more insights into the current state of this seemingly unstoppable niche.
What picture do statistics for this year paint compared with those from a year ago and pre-pandemic?
Otero: Based on commentary from publicly traded SFR REITs, I would say that the picture is just as rosy, if not more colorful, than from a year ago or pre-pandemic. Sure, we did see a huge influx of people renting homes for the first time during the pandemic, but since then, we’ve seen more relocation from across the country. Companies continue to relocate their headquarters and employees into more tax-favorable states like Texas and Florida, which gives SFR developers ample room to grow their inventory based on the amount of unprecedented demand they are seeing from prospective tenants.
Why/how is the sector’s performance different from the one exhibited by the multifamily industry?
Otero: The SFR sector is different from the multifamily industry in that there are only three publicly traded SFR REITs compared to eight to 10 multifamily REITs. In addition, many of the SFR players are spread out across the country with a diversified portfolio, while some of the multifamily companies only focus on a particular region—like the Sun Belt, the Midwest or the West Coast.
From a total return perspective, the publicly traded SFR REITs have only outperformed the publicly traded apartment REITs by approximately 1 percent.
How difficult is it to enter the SFR market?
Otero: “If you build it, they will come” is the mantra in the industry and many players are jumping into the sector. If you have deep pockets, it is not hard to enter the market right now. The industry is dominated by a handful of public and private players with many other smaller companies entering the fray. It’s a sector that is seeing enormous investment demand and it doesn’t seem like that is going to stop for some time to come.
What is the impact of these troves of investors and lenders on the sector?
Otero: This is a great question as we don’t know how this is going to play out. With so many lenders offering capital, it makes it easier for new players to enter the space. With so many investors clamoring to own these places, we are seeing a run-up in housing prices based on investor demand to buy homes. At some point, there won’t be any more homes for investors to buy on the open market and it will lead to more ground-up development of single-family rental communities and properties.
We have seen stories across the country of landlords telling prospective tenants to “make their best offer,” which means they are trying to see how much the tenant is willing to pay above the asking price to rent the property. With so few homes to rent and so many investors and prospective tenants demanding these properties, it is clearly proving to be a landlord’s market right now.
Is the SFR market strong enough to meet the rising demand?
Otero: While the SFR market has always been a meaningful component of the U.S. single-family housing market, it really was not until the institutionalization of SFRs over the past 10 years that it became a viable and “mainstream” alternative to traditional homeownership. The cost of ownership is one important factor that causes residents to consider SFR, but there are other factors at play including flexibility, convenience and value proposition.
Institutional landlords also have the financial strength and technological advancements to provide a better and more desirable product than a mom-and-pop owner and thus have the staying power to meet demand and thrive in the current market environment.
Which regions are preferred by SFR investors and why? Are those areas also leading in SFR development?
Otero: Single-family rental investors have a clear preference for markets and regions with higher population and employment growth. They also favor markets that tend to be more affordable as it relates to costs such as property taxes, insurance, etc.
Investors also favor markets with younger housing stock, typically 10 years or younger. These characteristics guide investors to higher growth markets in the southeastern and southwestern parts of the country, along with select mid-western markets.
The Northeast and coastal California are not heavily represented by SFR investors as they fall short of many of the characteristics highlighted above. In terms of SFR development, this activity is also heavily skewed towards the southeastern and southwestern states.
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In some metros, multifamily trades have begun to soften, signaling investor caution. What does the investment landscape look like in the SFR market?
Otero: There are certainly corollaries between the multifamily and SFR markets. Rising interest rates have introduced a degree of caution on both fronts as more levered buyers have been, at least temporarily, forced to the sideline. The risk of rising rates, coupled with the risk of recession—and the potential for demand to wane—causes the bid/ask spread on transactions to widen. In other words, it becomes harder for buyers and sellers to come to terms on price.
Macro environment aside, the investment landscape for SFR still looks quite attractive given the supply-demand imbalances, which will remain in place despite rising interest rates or the risk of an economic slowdown.
How sustainable is this fantastic growth the SFR sector has been experiencing recently?
Otero: The SFR sector has room to run given the industry has opened new channels to growth in the form of the purpose-built or built-to-rent model. We also need to factor in the benefits to the industry deriving from smart technology, which has streamlined every aspect of the business, from leasing to property management to maintenance. These technology enhancements have had a meaningful impact on operating margins and there is still room for further improvement.