Expanding Workforce Housing Through Single-Family Investment
- Feb 21, 2018
At the end of 2017, The Steinbridge Group announced its plan to expand workforce housing in urban neighborhoods through a $425 million investment in single-family residential properties. What distinguishes the initiative is its focus on a very different set of assets, instead of the high-end, amenitized multifamily units that usually attract capital. In the following exclusive interview with Multi-Housing News, Steinbridge Group CEO Tawan Davis details this strategy.
Large investors are increasingly targeting single-family residential assets. How does Steinbridge differentiate itself?
Davis: Although several large investors have focused on the single-family residential market, our strategy is unique for several reasons. First, we target parts of the country where other large investors have not acquired homes. These are judicial states where it is difficult to acquire large blocks of foreclosed homes from banks. Second, we are focused on urban areas, instead of the suburbs and secondary markets where many investors have focused. Third, we are investing in middle-income housing targeted at working families. Finally, we are investing in transitioning neighborhoods in and around the metropolitan centers.
What do you think will be the most attractive investment opportunities for Steinbridge in the next 12-18 months, and why?
We believe that several demographic and economic shifts have impacted homeownership and made renting a more viable alternative to a long-term option for many American families.
Over the next 12-24 months, Steinbridge will focus on acquiring single-family and small multifamily residential units in major cities (and regions) on the Eastern seaboard. That includes Philadelphia, New York, Washington, D.C., Northern New Jersey and—eventually—Boston.
What can you tell us about capital markets from the perspective of the single-family sector?
Davis: These shifts I mentioned have led to increased sophistication in the financial markets’ funding of single-family rentals. Before 2011, there were no publicly traded single-family residential REITs. Additionally, there had been no large securitizations of single-family homes, and there was little institutional capital behind single-family rental strategies. Since then, the financial markets have begun to mature and the single-family rental space has become one of the fastest-growing, most impactful and best-performing commercial real estate sectors.
Steinbridge recently launched a $425 million investment program to expand workforce rental housing. How does this program fit into the company’s overall strategy, and why did your firm decide to introduce it at this time?
Davis: Steinbridge approaches real estate as a long-term, wealth-preserving asset class—not a short-term trade. This philosophy focuses us on income-producing strategies that augment cash flow. We do not generally fix and flip properties, raise short-term funds or pursue speculative ground-up developments unless we plan to hold them for our portfolio. We build fully operational businesses around our strategies or ideas, which optimizes operational execution and flexibility.
Our particular strategy in the single-family rental space uniquely responds to our overall philosophy. For us, it is a fully operational business that we intend to grow over time. We provide quality residences for working families, for which there is a perennial need in the major cities. Our detailed operations aid in tenant retention, maintaining a high quality of homes and reducing operating costs. Because we are investing in growing neighborhoods in strong American cities, we also benefit from the value appreciation occurring in and around the urban center.
Why did Steinbridge choose the single-family market over multifamily as the focus of its investment strategy?
Davis: First, we focused on single-family residential because of the growth opportunity in the space for institutional investment, management and operations. United States single-family houses for rent represent the largest real estate investment asset class, valued at approximately $3 trillion. This figure outstrips the multifamily rental market of approximately $2.5 trillion and dwarfs all of the other categories.
Yet, until recently, single-family residential remained real estate’s most disaggregated and un-institutional category. Of the approximately 135 million housing units in the U.S., around 84 million are single-family residences. Of those 84 million, roughly 17 million are rented. If you include the approximate 4 million two- to four-unit dwellings, then roughly a quarter of the U.S. housing stock is occupied by renters. Of those 21 million dwellings, only around 300,000, or about 1.5 percent, are owned and operated by institutional owners, which is defined as those who own a mere 100 homes or more. For us, this provides a unique and timely entrepreneurial growth space in the sector.
How do single-family yields compare to those of multifamily?
Davis: We focus on single-family rentals instead of multifamily communities because they offer a meaningful yield premium. In response to the demographic transitions that have impacted the housing market and increased rentership, real estate developers and investors initially focused on high-end multifamily development. This drove up competition and development costs and drove down cap rates and returns for that product type. In some markets—like New York, Philadelphia and San Francisco—the spread between interest rates and unlevered yields for multifamily can be flat or even negative.
On the other hand, the spread over interest rates for single-family homes is consistently positive, and higher than that of multifamily. We have found roughly a 150-200 basis point spread in the stabilized unlevered yield between multifamily and single-family investments.
Which trends in the real estate industry do you find most relevant?
Davis: The net effect of the tax bill is difficult to forecast, but it will likely be among the major focuses of 2018.
As we know, real estate can be a litigious business. What can you tell us about the legal issues that companies in the industry face?
Davis: Real estate is indeed a litigious industry. I think that is the case for at least four reasons. First, there is only so much land and only so many real estate opportunities to go around. This means that each investment opportunity is very valuable and attracts intense competition. Second, real estate is a capital-intensive industry. Whether in a family, a partnership or a corporation, when that much money is exchanging hands in so many transactions, there is opportunity for disagreement.
Third, the real estate business is complicated. There are several layers of engagement ranging from landlord-tenant, to construction, to tax, to partnerships, to neighborhood relations—and the list goes on. A difference of perspective in any one of those engagements is governed by separate facets of the law. Finally, the real estate business seems to attract rather intense personalities.
Our goal is to constantly behave ethically and fairly and, when challenged, respond vigorously to protect our employees, investors, tenants and communities. In the course of our growth, we have faced one major and one minor legal challenge, both of which have advanced favorably.
Image courtesy of The Steinbridge Group