Why Some SFR Investors Are Hitting the Pause Button
Rising interest rates are hitting home for some of the biggest players, according to columnist Lew Sichelman.
Another major institutional investor in single-family rental properties has pulled back from a buying spree that has made it one of the nation’s largest landlords.
Blackstone-owned Home Partners of America has announced it will cease buying houses in 28 cities as of Sept. 1, and will stop purchases in 10 more cities as of Oct. 1. “We hope to resume purchasing homes in these markets in the future,” the announcement said.
At the same time, though, the buy-to-own company will continue to add to its portfolio in 20 of the country’s highest growth markets, according to Blackstone, which acquired HPA in June 2021 for $6 billion. In a statement, the company said it is pausing in markets that represent less than 5 percent of its activity.
In announcing the pull out, HPA said it “assessed several factors such as home price appreciation, state and local regulations and market demand” in guiding its investment decision.
Among the markets where it has already “paused applications” are such hot spots as Boise, Virginia Beach and Memphis. Next month, it will halt applications in Albuquerque, Asheville, Myrtle Beach and Tucson. (A complete list follows at the end of this article.)
According to the company’s website, it is not purchasing houses in Champlin and Maple Grove, Minn., two towns in the Twin Cities suburbs that recently passed laws designed to make it more difficult for single-family landlords to operate. It is still buying houses elsewhere in the area.
In pulling in its horns, Home Partners is joining other investors, both big and small, in curtailing its activities. According to a Bloomberg report, Invitation Homes, American Homes 4 Rent and KKR & Co.’s My Community Homes are among those that have slowed purchases during a period of high home prices and rising financing costs.
Rising Cost of Capital
During American Homes 4 Rent’s second quarter earnings call, CEO David Singelyn told his company’s shareholders that “capital costs for us as well as for the individual home owner has changed, and that’s got to get reflected in the marketplace.” Dallas Tanner, CEO of Invitation Homes, said to be the largest investor in single-family rental houses, echoed that same sentiment during his company’s second quarter earnings call. “We don’t love where our cost of capital is today on our balance sheet,” he said.
Similar statement were made at two of John Burns Real Estate Consulting’s recent capital market conferences. And as a result, the Irvine, Calif.-based company believes that “as capital markets recalibrate, we will likely see a slower pace of acquisitions from all institutional investors.”
Even the fix-and-flip guys are slowing down. The Burns firm found in a July survey that 35 percent of the flippers lost deals because financing costs moved out of reach. “This is a much higher risk environment due to rising rates,” an Atlanta flipper told the company’s pollsters. “Sellers still have not reset expectations from earlier this year, so acquisitions have essentially come to a halt.”
According to Redfin, investors of all ilk purchased 87,500 houses in the second quarter. That’s up from the same period a year ago. But it’s down from the record 93,700 they bought in last year’s third quarter. Prior to the pandemic, they were buying just 60,000 per quarter.
Not every investor is being scared off by high prices and high mortgage rates. Some are taking advantage of cooling competition and are using strong rental demand to offset the higher cost of buying, said Sheharyar Bokhari, a senior economist at Redfin.
“Investor purchases probably won’t bounce back to 2021 levels, but they’ll likely remain more common than before the pandemic because the housing market is stable compared with today’s volatile stock market,” the economist said in a press release. “Those who buy properties as rentals will still cash in, with high demand and vacancies near record lows,”
At the same time, Bokhari expects that those that are taking a break will be back, though probably not at the same level.
Blackstone’s Approach to SFR
Blackstone’s HPA operates differently from other investors in that it offers a “path to home ownership” for its customers. Its clients choose the houses they want to purchase and the company buys them. It then leases the houses to those customers, who are given the opportunity to purchase them from HPA anytime over a five-year period.
The Chicago-based company provides its anticipated terms with five years (three in Texas) of locked-in monthly rent amounts, right-to-purchase prices and estimated repair costs. If the customer agrees, it submits a competitive cash offer to buy the home. And if the seller accepts the bid, HPA’s customer signs a one-year lease and the right-to-buy contract.
The client has the option to buy the house from HPA at any time. At the end of the first year, he can renew for another year or walk away without penalty. The lease can be extended for up to five years (again, three in Texas).
As of Sept. 1, HPA has paused applications in: Akron, Baton Rouge, Birmingham, Boise, Cincinnati, Columbus, Des Moines, Detroit, Fayetteville, Fort Wayne, Fresno, Grand Rapids, Huntsville, Lexington, Little Rock, Louisville, Madison, Memphis, Milwaukee, New Orleans, Omaha, Reno, Salisbury, Spokane, Springfield, Vallejo, Virginia Beach and Wichita.
As of Oct. 1, it will pause applications in: Albuquerque, Asheville, Augusta, Charleston, Deltona, Greenville, Knoxville, Lakeland, Myrtle Beach and Tucson.