Insights: Investors Pump the Brakes on Single Family Rentals

Investors Pump The Brakes on Single Family Rentals
By Exceedant Research and Analysis Team – Date: November 25, 2022

During Q3 2022, investors purchased about 66,000 homes in the 40 markets tracked by Redfin, in sharp contrast with the 94,000 homes they bought during the same period in 2021.  This drop off in investor acquisitions is the largest in a single quarter since the onset of the great recession, except for Q2 2020 when COVID effectively halted most home buying.

Institutional Investors Supercharged an Already Red Hot Housing Market

Until recently, demand by companies such as Invitation Homes, American Homes 4 Rent and Tricon supercharged an already red hot housing market.  The competition for homes was so fierce that it spawned the emergence and then spurred the growth of an innovative new breed of highly specialized, tech savvy brokerage firms, whose substantial technical capabilities provided institutional investors with sizable advantages in their headlong pursuit of a suddenly scarce and highly sought after commodity.

Moreover, these firms provided the ideal platform from which institutional investors could quickly scale, and to do so with surprisingly few personnel.  These platforms constituted asset light models carefully crafted to facilitate the scalable acquisition of single family rentals.  This group includes firms such as Entera, Picket and Mynd.  Their model is disruptive to both the SFR and real estate brokerage industries.

Single Family Rentals (SFR) Benefitted from a Perfect Storm of Circumstances

During 2021 investors were increasingly attracted to this asset class, drawn by a perfect storm of circumstances.  These included a COVID-induced yearning for more space, wholesale acceptance (at least temporarily) of remote work, historically low interest rates, skyrocketing rents/coupled with stimulus money which helped make such rents affordable, and virtually unprecedented asset appreciation.  When these circumstances emerged at the same time, it was too much for institutional investors to ignore let alone forego, resulting in robust migration into the space.  Moreover, the SFR sector looked even more attractive when contrasted with the headwinds being experienced by the office and retail real estate sectors.

By Q3 2022, Investor Activity Moderated Somewhat

By Q1 2022 investors were responsible for the purchase of one out of every five houses sold across the country.  However, during Q3 2022, investor activity moderated, contributing to an overall decline in home sales.  One factor contributing to this trend has been a slackening in the pace of rental increases.  Moreover, the market entered a discovery phase, with factors such as rising interest rates and declining affordability leaving buyers and sellers at odds over pricing. 

The Trend Towards Institutionalization of the SFR Asset Class is Accelerating

However, the trend towards institutionalization of single family rentals and their robust appetite for acquisitions are likely to return to full strength in the foreseeable future, with firms such as JP Morgan Chase & Co. continuing to view the sector favorably, while conserving plenty of dry powder.  More specifically, JP Morgan’s asset management arm has disclosed the formation of a joint venture with landlord Haven Realty Capital with plans to acquire and develop $1 billion in single family rental homes.  So, while the pace of investor acquisitions of SFRs has tempered somewhat, major players are carefully biding their time, building a deep bench, and lining up capital, while determining the opportune moment to press down on the accelerator.

These players include a unit of JLL’s Investment Management which, in conjunction with landlord the Amherst Group, aims to acquire $500 million in single family rentals over the course of the next two years.  The joint venture has already purchased 360 renovated single-family homes, scattered sites dispersed across 10 states, carrying a value of about $120 million.  It is worth noting that this isn’t JLL’s first foray into the single family sector.  Last year, JLL Income Property Trust bought a 47 percent stake in a $1.2 billion 4,000 rental home portfolio put together and overseen by Amherst.

Institutions have bet heavily on the entire SFR sector, investing in more than just the properties themselves.  During March 2021, JLL acquired a minority stake in Roofstock, a leading tech empowered housing rental platform.  The transaction underscores JLL’s commitment to the space, which represents a departure from the company’s typical investments, such as multifamily buildings, grocery-anchored retail outlets, office buildings and industrial properties.  JLL and other real estate titans seem to be sold on the single family rental sector, and are in the midst of undertaking foundational steps to help position them for long-term success.

The popularity of the single family rental sector continues to grow, with Jeff Bezos backed Arrived Homes engaged in the fray.  While growth is one part of the story, institutionalization is another, with an increasing number of institutional investors emerging to stake their claim in a real estate sector that was once almost exclusively within the domain of small landlords.

So, although investors have temporarily slowed the pace of their acquisitions, don’t expect that to last long.  All in all, the signals indicate that investors will expedite the pace of their purchases once more favorable conditions emerge.

Any One or a Combination of Circumstances May Trigger an Increase in Institutional Purchases

The tipping point could consist of any one of or a combination of factors, such as a decline in home prices or a moderation in the pace of interest rate increases.  Moreover, the volume of acquisitions won’t necessarily be evenly distributed.  Institutional money can be opportunistic, and may deploy capital through bulk acquisitions from a variety of sources, including builders looking to offload surplus inventory in a sluggish market.

Conclusion   

Curiously, the success enjoyed by publicly-traded Single Family Rental companies has not translated into strong performance in the stock market.  As a result, shares of companies such as Invitation Homes, American Homes 4 Rent and Tricon are down sharply for the year.  Institutional investors may be able to deploy novel tools to address this issue, an important piece of the puzzle which we will discuss in a subsequent post.

By Exceedant’s Research & Analysis Team, November 23, 2022

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Notice: This article does not constitute investment, financial, legal, tax, accounting or any other type of professional advice. 

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