Report: Investor Interest in SFR Ebbing

Lew Sichelman

Investor interest in the single-family rental market is waning, especially in places where the sector has been the strongest, according to a new report from First American Financial Corp.

“Despite some regional variations,” the report states, “investor participation (in the housing market) has declined”

After growing from an average of 12.4 percent market share to 20.4 percent in the nation’s 50 largest markets between February 2022 and May 2023, the share has dropped back down to 16.2 percent.

Investors are just as responsive as other home buyers to evolving market conditions, Xander Snyder, a senior commercial real estate economist at First American and the report’s author, observes. And it’s “likely” they are reacting to the current uncertainty in valuations and yields to re-evaluate the portfolio allocations.

Of particular note, the report finds rising interest rates have made it “more costly to acquire investment properties” and “muted commercial real estate transaction volumes in general.” And that, Snyder writes, “has spilled over into the SFR market as well.”

First American is a provider of title, settlement and other services. For the study, any single-family house sale in which the buyer was a corporation, LLC, trust or other key business identifier was considered an investor purchase.

Snyder places the sector into four Boom and Bust categories, with Boom cities being places where investor activity increased more than average during the pandemic and Bust markets where their participation has slipped more than average from the peak of activity:

Boom-Bust: In several Southeastern markets, house buys by investors took off during COVID. But since then, their purchases have “retreated significantly.” And the pattern is most discernable in mid-size markets that became destinations for people leaving larger cities.

Snyder cites Birmingham and Memphis as examples of this trend. From their peaks, the investor share has dropped roughly 15 percent in Birmingham, Ala., and 12 percent in Memphis, Tenn.

Early investors were able to capitalize on the increase in demand from pandemic migration patterns, the analyst says. But since then, higher interest rates and inflation in property maintenance expenses, combined with higher home prices, “have likely compressed profit margins and limited the upside available to investors in several of these markets.”

Boom-No Bust: Some of the largest increases in investor purchases occurred in smaller Midwestern markets. And their activity has remained relatively strong.

Snyder says investor participation has stayed within 3 percent in markets like Indianapolis and St. Louis, where a downturn has yet to occur, if it ever will. “Steep costs of living in many coastal markets have pushed investors towards the up-and-coming Midwestern rental market,” he explains.

No Boom-Bust: Except for Salt Lake City and Phoenix, the more expensive Western markets largely missed the boom, and whatever investor activity there was in single-family rentals has fallen, according to the report.

In Las Vegas, San Jose and Sacramento, for example, the decline in investor share exceeded the pandemic increase, resulting in a net decline compared with pre-pandemic levels.

“It’s harder for investors to earn a return on an investment if they have to buy at a higher price, and higher prices are more prevalent in less affordable markets like those found in California,” Snyder writes.

Furthermore, since people were moving from pricier markets to less expensive ones where they could work remotely, it only “makes some sense that investors increased their SFR purchases in places that were more affordable and in higher demand.”

No Boom-No Bust: Not every place has participated in the SFR phenomenon—New York and Philadelphia, to name two—so there has been no meaningful decline in investor purchases.

The report offered no prediction about what lies ahead for the SFR market. But Snyder did close with this description in the sector as a whole: “What went up is now trending down.”