The pandemic has proven the resiliency of SFRs as an asset class that can work in a stressed environment and outperform other real estate sectors, according to Anthony Cazazian, managing director & head of U.S. Residential Real Estate at Man Global Private Markets. Cazazian argues that SFRs provide institutional investors the opportunity to further invest in the U.S. housing market and gain the portfolio diversification benefits the asset class offers relative to multifamily and all other core real estate sectors.
Man GPM, the $3 billion+ private markets business of Man Group, has been investing in U.S. residential real estate in both equity and debt since 2012. Here’s why Cazazian expects significant investment and consolidation in SFRs going forward.
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The health crisis accelerated demand for single-family rentals as families with children and people who work from home wanted more space than is commonly available in urban apartments. Do you think this trend will outlast the pandemic?
Cazazian: We believe demand for single-family homes overall, including single-family rentals, began increasing before the pandemic and expect to see this increased demand endure post-pandemic. At a very macro level, population growth drives demand, and family formation generally drives a need for more space. Given the Millennial generation represents the largest age cohort in the U.S., it is no surprise to us that demand for single-family homes has been increasing as that generation began and continues to reach life’s major milestones. This is in fact one of the main reasons Man GPM saw significant opportunity in the asset class when it began investing in the space almost a decade ago.
Major life events like marriage and having children naturally lead most people to look for more space and therefore at a single-family home, whether that is to buy or rent. Surprisingly, only 11 percent of apartments in the U.S. have three or more bedrooms, according to John Burns Real Estate Consulting, which limits the opportunities for space in multifamily.
Separately, the pandemic further increased demand for space, some of which we believe is a permanent shift and can have lasting implications on the asset class. For example, the widespread adoption of video conferencing and employers moving to agile working models will likely have long-term positive impacts on demand for single-family homes and rentals that offer more space and a more affordable lifestyle, even if they are further away from city centers.
What’s the overall outlook for the SFR market relative to multifamily? Do SFRs take away demand from apartments or are they complementary property types?
Cazazian: In our view, SFRs will continue to outperform relative to multifamily over the next several years across multiple key categories such as occupancy, rent growth and capital appreciation. This is a result of several factors:
- SFR demand increasing from Millennials at the expense of multifamily;
- SFR demand increasing due to pandemic-led changes in lifestyle preferences;
- Single-family home inventory near all-time historical lows, according to research from the National Association of Realtors as of June 2021. Single-family permits have been significantly below historical averages between 2008 and 2019, while multifamily has been significantly above since 2014, per data from the U.S. Census Bureau and John Burns Real Estate Consulting;
- Many institutional investors are allocating capital to SFRs for the first time, many of whom are diversifying their multifamily exposure or diversifying away from other real estate asset classes.
There are certain instances in which SFRs can take demand away from apartments and vice versa, but we believe they are ultimately complementary property types catering to the different needs—such as the number of bedrooms, backyard space, amenities, proximity to city centers and social activities etc.—of consumers at all stages of their lives.
Yardi Matrix data shows that SFR developers are mostly focusing on Sun Belt and Midwest metros, with relatively little growth in the Northeast and gateway metros. What type of market-level disparities are you observing?
Cazazian: Traditionally, most SFR investors have focused on markets outside of the Northeast and gateway metros as other markets have tended to offer on average a better combination of macroeconomic/demographic/migration trends, age of housing stock and rental yields.
From a development perspective, the Northeast and gateway metros tend to be less development-friendly, have less attractive land availability or are too expensive to build single-family rentals—all detracting from SFR developers focusing on these markets.
We expect these trends to continue but do see further market expansion for SFRs as investors continue to enter the space. At Man GPM, we have predominantly focused on the South region of the U.S., with diversifying exposure in the Midwest and West regions including acquisitions of existing homes and new homes as well as build-to-rent developments.
Despite growth, institutions remain a small part of the SFR market. Do you see institutional investor ownership in SFRs increasing over time?
Cazazian: Multifamily began with limited institutional investment initially and grew significantly over time, and similarly we expect institutional ownership of the SFR market to continue to increase from its current share of 2 to 3 percent. We believe it is still the early innings of institutional investment in the asset class. Until recently, most institutional investors remained on the sidelines until they had evidence that the asset class could withstand a downturn—which was proven out in 2020.
We expect significant further investment and consolidation in the asset class and expect it to come at a faster pace than we saw in multifamily during its early years of institutional investment, given the speed in which investors and capital can move today.
What’s the argument for institutions to allocate capital to SFRs?
Cazazian: U.S. housing is the largest and most liquid real estate asset class in the world, according to research from John Burns Real Estate Consulting as of the second quarter of 2021, which by definition means that it warrants attention and a place in a portfolio for many institutions. Historically though, institutions have only had direct investment exposure to U.S. housing through multifamily, which represents just one portion of the overall U.S. housing market.
With some institutions having invested in SFRs over the past decade, there is now a significant track record to support institutional consideration of SFRs as a way to further invest in U.S. housing and gain the potential diversification benefits it offers relative to multifamily and all core real estate sectors.
In addition to portfolio diversification, we are at a point in time of a housing supply-demand imbalance with strong macro and demographic drivers that we believe should persist for some time and continue to provide attractive risk-adjusted returns.
How is the availability of debt for investors in the SFR market? What types of lenders are the most active in the space?
Cazazian: Availability of debt for investors in the SFR market has grown tremendously over the past decade and is accessible at attractive rates today. Lenders include local, regional and national commercial banks, investment banks, life insurance companies, pension funds, specialty finance companies, mortgage REITs, private lenders and others. In addition, increasing bond investor appetite for SFR securitizations has led to significant growth since the first SFR securitization in 2013, with issuance hitting almost $10 billion in 2020, according to Trepp research.