Single-Family Rentals: An Opportunity ‘Hidden in Plain Sight’
Pretium’s Dana Hamilton on the accelerated demand for single-family rental homes, a trend that’s being fueled by increased interest in suburbs.
Although a popular property type even before the pandemic, the single-family rental business has not only benefitted from residents’ increased interest in more spacious suburban settings but it has also proven to be resilient in the face of uncertainty. According to the joint National Rental Home Council and John Burns Real Estate Consulting Single-Family Rental Market Index for the second quarter of 2020, demand for single-family rental homes surged, with the Southeast and the Southwest seeing the most growth.
With such an appetite for this product type, institutional investment in single-family rentals is mounting. Most recently, Pretium and Ares Management Corp. partnered to acquire Front Yard Residential Corp. in a deal valued at approximately $2.4 billion and the sector’s first public-to-private transaction. This move has made Pretium the nation’s second-largest owner and operator of single-family rentals. To understand what makes the sector so appealing and what opportunities lie ahead, Multi-Housing News talked to Dana Hamilton, the company’s senior managing director and head of real estate.
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What can you tell us about investors’ current interest in the single-family rental sector?
Hamilton: We have seen investor interest in the single-family rental space growing for some time. While investors are now paying greater attention to deurbanization trends, the real “call to action” has been the resiliency the single-family rental sector has demonstrated throughout the pandemic.
What is pushing residents toward this asset class?
Hamilton: Millennials in search of more space and a lower cost of living were already moving to the Sun Belt, to the suburbs and to single-family housing prior to the pandemic. What we have seen more recently is an acceleration of these trends. The decision to rent rather than buy is typically not a function of income or interest rates. Instead, it is a function of lack of down payment, credit score and/or the burdens of student and consumer debt. We also see a small—but growing—cohort of renters by choice, which contributes to increasing demand.
What are the most appealing features attracting residents to single-family homes?
Hamilton: First and foremost, residents want location and a place that is their own. Pretium’s single-family rentals give residents access to homes in well-established neighborhoods, with good schools and without the burdens of homeownership. Beyond that, residents look for a well-maintained home and the peace of mind that comes from professional management. More recently, we have seen residents also looking for additional space, as work-from-home and school-from-home become increasingly important considerations.
How do you expect the work-from-home model to impact the sector going forward?
Hamilton: The single-family rental sector is one of the clear beneficiaries of the work-from-home method—both in the near term and the longer term. Recent experience has taught all of us there is much more that can be done from home than previously understood and it has reminded us that much of what we need can be delivered to our doorstep, regardless of where we live. While we all want a return to normalcy, my view is that our new normal is going to include more work from home and school from home than we had before—and that is just one more reason for households to seek out the space provided by single-family rentals.
Please talk about the best markets for this property type and what makes them so appealing to investors.
Hamilton: Pretium started with the thesis that we wanted to acquire homes that would be attractive to the growing population of young families in markets characterized by above-average population and employment growth, which led us to the Sun Belt. These have been extraordinary markets for us and we believe they should continue to outperform. That being said, the persistent imbalance in new demand for single-family housing and new supply make any number of markets and segments of single-family housing appealing. As a data-driven company, we are constantly exploring these adjacencies to identify new areas of opportunity.
Do you think single-family rentals will draw more attention from institutional investors going forward? If so, why?
Hamilton: Ten years ago, there were no institutional single-family rentals in the U.S. The first step was for companies like Pretium to demonstrate we could build scale—scale to operate efficiently and scale to enable meaningful institutional investment.
Over the past eight years, Pretium has not only built scale, but we have delivered performance. Instead of thinking about single-family rentals as individual homes, increasingly institutional investors see portfolios of homes as synthetic commercial real estate assets—and they are attracted to single-family rentals’ durable cash flows and strong operating margins.
The last piece of the puzzle is transparency—and this is also changing. Today, there’s a robust public market for single-family rental securities, both equity and debt. In addition, companies like Pretium are creating meaningful liquidity for investors, as we did with our 2019 strategic recapitalization of a 20,000-home portfolio, and as we did more recently with the announcement of the industry’s first public-to-private transaction.
I believe these three factors—scalability, performance and transparency—are key to attracting increased institutional investment.
Do you intend to continue growing your single-family rental portfolio? What is Pretium’s strategy for 2021 and beyond?
Hamilton: We see single-family rentals as a massive opportunity that until recently was hidden in plain sight. There are between 15 million and 16 million existing single-family rental dwellings in the U.S., representing more than 12 percent of all U.S. housing, making the single-family rental industry comparable in size to the 10-unit-plus multi-housing market.
We expect to continue to be a leader in the professionalization and consolidation of the industry. The single-family rental sector is in the very early stages of meaningful growth as an asset class, with only two to three percent of the market in the hands of institutions such as Pretium.
What are your expectations for the single-family rental sector? What should investors keep an eye on?
Hamilton: Having spent 20 years in multifamily in the U.S. and Europe, I can tell you the single-family rental sector is different—and it is difficult. Companies like Pretium became the pioneers in the space because they saw an enormous macro opportunity. And, instead of assuming that single-family rentals could not be as efficient as multifamily, they used modern technology and sophisticated data analytics to build remarkably scalable platforms. Even before the pandemic, Pretium’s single-family rental margins were equal to or better than those of the multifamily REITs. I continue to believe the single-family rental sector is the most interesting and exciting sector in U.S. real estate.