How SFR Investors Can Stay Ahead of the Curve
Atlas Real Estate CEO Tony Julianelle on trends in the single-family rental space.
Single-family rentals have quickly grown from a fragmented niche of smaller landlords to an institutional-quality investment type. High demand for these properties reflects renters’ preference for flexibility and convenience and is sustained by construction activity.
Over the past two years, Atlas Real Estate CEO Tony Julianelle has noticed a new trend: large owners have become net sellers—a sign of ripening in the industry due to where we are in the interest rate cycle, he believes.
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“Before 2012, SFR properties were owned by mom-and-pop owners, and there was virtually no institutional capital in the asset class,” Julianelle said. “The foreclosure crisis created an opportunity for institutional capital to enter the space and now, a decade later, the sector has matured.”
Atlas currently manages and owns 1,700 single-family rental properties across seven states, and handles property management services for other investors’ communities in 10 states. We asked Julianelle to drill down into the current dynamics of SFR. We wanted to know what’s fueling demand and other trends to watch for.
The first half of this atypical year is behind us. How has it been so far for the SFR sector?
Julianelle: SFR continues to be a very resilient asset class as home values have continued to appreciate and demand is strong. The most interesting thing about SFR is that the largest owners have become net sellers of assets in the current interest rate environment. Those homes are being offered to the resale market, creating additional inventory for homebuyers. Many of these homes were acquired as distressed assets following the Great Financial Crisis, and the investor who purchased them has made meaningful improvements to the properties and is now offering them for sale.
I anticipate that this trend will continue for the foreseeable future if you consider that a meaningful portion of the capital deployed in SFR is from closed-end funds that will need to sell assets to return capital to their investors. With debt pricing as it is, the best path to disposition of these homes is as a retail sale instead of a portfolio sale to another investor. At Atlas, we work with several institutional investors to help them maximize their return by offering homes for sale on the retail market.
Tell us more about the strategy behind these sales.
Julianelle: This is a moment in time—and it is directly related to the cost of debt and the lack of inventory. With rates as high as they are, institutional investors are looking at having to purchase homes unlevered, which means they cannot achieve opportunistic returns. Most of the capital available is seeking IRRs in the high teens, and SFRs can’t accomplish those returns due to the cost of debt.
If home prices fall, which seems unlikely due to continued undersupply, or interest rates drop, then SFR owners will shift back into acquisition mode. The long-term trajectory of SFR is likely quite strong because institutional ownership still only makes up about 3 percent of the market. There is a lot of room for growth in the coming years—and demand is likely to remain high.
How are you staying on top of trends? How have you been mitigating higher costs?
Julianelle: The most important thing we’ve done is focus our efforts on standardized processes that drive higher occupancy and collections rates while emphasizing the resident experience to increase renewals. The greatest cost to an owner today is the combination of vacancy and construction expenses that are created when a resident decides to move. If we can build a meaningful relationship with residents and extend their time in a home, that has a real impact on the returns we’re able to drive for the investor.
In addition, we’ve made substantial investments in data infrastructure and a data team that enables us to make better decisions at the asset level. Building out a data warehouse and reporting tools has been instrumental in our ability to manage more efficiently and effectively.
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The “repair” narrative in the SFR market suggests significant investments in home improvements. Could you elaborate on this trend and its broader impact on the housing market?
Julianelle: Institutional investors were originally buying SFR at foreclosure auctions, and most of the homes needed substantial investments to be brought to the rental market. As these homes were owned over the past decade, institutional owners were proactive with repairs and maintenance as well as major capital improvements like HVAC, roofs, structural repairs, etc., as the homes needed them.
Unlike individual owners, the institutions had the wherewithal to maintain these homes at a high level and incentives to do so as the quality of the home drove rent increases over time. Even after the foreclosure crisis had abated, institutional buyers were still better positioned to purchase homes that needed repairs than an individual buyer who typically lacks the financial resources to both purchase and improve a home at the same time. As a result, institutional ownership has helped to improve the overall quality of our housing stock.
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What factors drive the growing demand for SFR properties today, and how do these factors differ from those influencing the broader multifamily sector?
Julianelle: The most impactful factor is the lack of affordability and the very high number of people who cannot afford to purchase a home. Right now, the cost to rent a home is roughly $800 lower than the cost to purchase the same home. At the same time that affordability is so challenging, we are seeing many households kind of “age out” of their Class A apartment phase of life and desiring a yard and a neighborhood, so demand for this type of living arrangement is climbing. We are also facing an undersupply issue of somewhere between 1.5 and 2 million homes—meaning household formation is outpacing new construction and the deficit of available homes continues to grow.
I also think that institutional ownership of SFR has made it more attractive. With 97 percent of single-family rentals still owned by small landlords, the resident experience has not been as positive. Individual landlords are less responsive to maintenance requests and will typically defer repairs rather than stay on top of them. This is attracting people to their product more reliably.
Looking ahead, what do you foresee as the most significant opportunities and challenges in the SFR sector over the next couple of years?
Julianelle: I think the biggest opportunity will be to help residents go from renting to owning their own home. SFR operators can play a meaningful role in creating a pathway to homeownership. At Atlas, every resident in one of the single-family rentals we own and operate has a path toward a substantial downpayment after residing with us for four years. We often say that when a resident moves out of an Atlas-managed property, we want them to move into a home they own. We would love to see larger SFR owners engage in this process and contribute more intentionally to homeownership.
The challenges in the near term are tied to operating efficiencies and controlling debt costs. One way we’re overcoming this is through our sister company Net Energy, which was launched two years ago to decarbonize SFR while adding to the net income of the property. With these improvements, our homes produce 60 percent less carbon, and we increase our net yield by 50 basis points on average. Residents love living in a smart home that they know is good for the environment, so renewal rates are higher and leasing times are faster.
