Tricon Residential’s CIO on the Sun Belt’s Ever-Growing SFR Market
Jonathan Ellenzweig weighs in on the sector’s stellar performance amid heated competition.
The unprecedented demand for single-family rentals is luring more and more investors and developers to the sector every day.
SFRs, which appeal to the growing preference for suburban housing, are seen as a hedge against inflation and other headwinds. The the current macroeconomic conditions can pose challenges, however. Additionally, finding the right operating partners can also be problematic, according to Jonathan Ellenzweig, chief investment officer at Tricon Residential. The company owns more than 35,000 single-family and multifamily rental homes across North America.
Last year, Tricon Residential joined forces with three institutional investors to launch a $5 billion joint venture that will acquire more than 18,000 single-family rental homes in the Sun Belt in the next few years. The company also formed a $1.5 billion partnership with Pacific Life Insurance Co. and a global institutional investor to acquire another 5,000 newly built homes in the same region.
MHN sat down with Ellenzweig to find out why Tricon is so bullish about this asset class, and whether the single-family rental market’s growth is sustainable in the long run.
READ ALSO: Why Lenders Are Flocking to SFR
How much has the Sun Belt SFR market changed in the past couple of years compared to when you entered the business in 2012?
Ellenzweig: Right now, many of the most desirable cities to live and work in the Sun Belt are seeing unprecedented demand for high-quality, well-managed homes to rent. Over the past few years, the single-family rental industry has matured from a mom-and-pop cottage business to a professionally managed, institutional-caliber asset class that fills a much-needed gap in the U.S. housing continuum.
Large SFR companies have introduced 24/7 customer care, rapid and attentive repair and maintenance practices, and professional management—similar to what occurred in the multifamily business—to transform and modernize the industry. Institutional landlords have successfully scaled their businesses to provide more viable options for high-quality and relatively affordable housing by deploying cutting-edge property management technology and investing in local maintenance and operations teams.
As the industry has evolved, so has the focus on environmental stewardship, social responsibility, and good governance practices. For example, in 2021, we launched Tricon Vantage, a suite of programs and services tailored to enhance our residents’ financial well-being. (This program) has already resulted in meaningful success for many of our residents, including an increase in credit scores, increased financial acumen and, in some cases, homeownership.
The SFR rental market is attracting a wave of investors and lenders eager to get in on the sector’s explosive growth. What barriers to entry need to be overcome?
Ellenzweig: Demographic shifts and demand for quality single-family housing in the Sun Belt are leading to a new focus across the Sun Belt. The region is home to 40 percent of the U.S. population but is expected to see 60 percent of overall population growth in the U.S. These factors, combined with challenging homeownership dynamics and predictable cash flow streams from rental income, make SFR a compelling asset class for both public and private equity investors, as well as lenders.
That being said, among the biggest challenges faced by investors is finding large-scale experienced and responsible operators to partner with. Operating an SFR portfolio successfully typically requires a meaningful up-front investment in both technology and people. For example, Tricon’s technology platform encompasses leasing—including self-showing functionality—customer service and maintenance functions, all of which have evolved and continue to evolve as we incorporate new features. Any investor can buy homes, but not everyone can operate them responsibly.
It’s also important to recognize that limited supply can impact investment. Like the rest of the country, the Sun Belt is experiencing the challenge of an imbalance of housing supply and demand, and the pressures are particularly acute in the rental housing market.
What can you tell us about occupancy across your SFR portfolio? How much has demand increased in the past couple of years?
Ellenzweig: There’s a shift taking place in how Americans choose where to live. Trends of de-urbanization, de-densification and work-from-home accelerated as families sought the privacy and space of single-family living during the pandemic. But rapidly rising home prices, coupled with high interest rates of late, are making homeownership more challenging.
We’re seeing is a higher demand for an essential alternative for families who desire a single-family lifestyle at an accessible price. But when families choose to rent, they realize that they’re no longer constrained to renting from mom-and-pop providers. They seek companies that can deliver great customer service and a high-quality living experience.
In terms of our own business, we receive approximately 40,000 leads for 1,000 available homes in any given month. Our same-home occupancy is around 98 percent.
In 2021, you partnered with institutional investors to acquire a combined 23,000 homes, primarily in the Sun Belt, in the next few years. Why are you so bullish about single-family rentals?
Ellenzweig: Last year was significant in terms of private capital raising for Tricon. The joint ventures we formed reflect institutional investors’ tremendous interest in participating in the sector and working with us as a landlord of choice. Our partners and we are bullish on this asset class because of the incredible opportunity to provide a much-needed housing alternative for American families, namely professionally managed single-family rental homes.
In addition to purchasing existing homes, Tricon is playing a leading role in build-to-rent, with a current development pipeline of over 3,000 rental units in 23 new home communities across the Sun Belt.
READ ALSO: Why Long-Term SFR Investors Face Less Risk
How are rising inflation, construction materials price increases and the labor shortage impacting the Sun Belt SFR market?
Ellenzweig: Inflation is definitely an issue for labor and materials; however, our efficiencies of scale allow us to benefit from national procurement programs that enable us to save money on parts, appliances and materials for our homes.
As an inflation hedge, we are exposed to both rising market rents and rising home prices on our balance sheet. We intentionally built our SFR business to be defensive and believe it will once again prove itself in the current environment.
Is the sector’s outstanding performance sustainable in the long run? How do you expect SFR properties to perform over the next 12 months?
Ellenzweig: SFRs provide essential housing in a supply-constrained housing market. With mortgage rates now above 5 percent, we estimate that the monthly cost of owning a home is 10 percent to 30 percent higher than renting a Tricon home. Therefore, we are confident in our outlook and firmly believe that SFR plays an essential role in addressing the critical challenge of America’s housing market, namely, an acute shortage of housing supply at more accessible prices.
You own and build SFR properties in some of the largest markets in the Sun Belt. Do you intend to enter new markets this year?
Ellenzweig: Tricon’s existing Sun Belt markets present a vast growth opportunity with a deep supply of resale homes, new homes and BTR developments to support our growth plans. In general, we are happy with our market exposure and have room to grow within those markets as we currently account for a negligible share of the overall market. We acquire less than half of one percent of homes available for sale in our markets in aggregate in any given year.