In 2010 it was seen as a quick way to make money, but Wall Street’s investment in single-family homes soon became an asset class in its own right, and the pandemic spurred its expansion. While the inventory of apartments for sale shrunk to historic lows, Institutional investors are not only devouring existing apartments, they are also starting to buy and rent new apartments. The latest fold is the arrival of big new home builders.
Hedge fund purchases of distressed homes (Blackstone was likely the first) during the Great Recession were welcome back then. They relieved lenders of many foreclosed homes (as well as bad loans that they later foreclosed) and were given credit set a floor under falling real estate prices. However, it was also feared that if prices rose and they dumped their investments, they would grow tired of managing scattered property rents and creating another crisis.
Apparently they worked out some of the management kinks. (Although the New York Times last year investigated key issues between Invitation Homes (owned by Blackstone) and their unfortunate tenants, we have summarized these findings. Here and Here.) But with the recession and less distressed homeowners, businesses ran out of bargains and also found the upkeep of the older homes they had bought, which resulted in profits. They didn’t cut and run, but they pulled back when they bought it. Moody’s says they got lost on shopping $ 100 million in single-family homes each month in 2013 to $ 20 million to $ 30 million three years later. They also consolidated, with larger companies like Invitation buying out smaller ones.
The business model works Furthermore Capital gains and benefit from rising rents. The larger owners are pooling real estate and using it as collateral for securities similar to those issued by Ginnie Mae and the GSEs. This is now a $ 15 billion market. In addition, three single-family real estate investment trusts (REITS) raised $ 18 billion through initial public offerings.
Wall Street investment in single family homes has gone up and down along with the rental market. Renting out single-family houses remains the domain of “mom and pop” landlords; institutional investors own less than 2 percent of this market as opposed to 55 percent of the apartment buildings. But that’s changing quickly.
When the millennials finally began to build households, apartment building picked up speed, but construction eventually caught up with demand and rents stabilized. Meanwhile, both younger households who might not be ready to become homeowners and some baby boomers who were fed up found their choice of apartment buildings limited. That gave another boost to the single-family home market.
Then came the pandemic and rising home prices, the desire to move out of the metropolitan areas, and the need for more space to work and study at home. Investors realized that this also meant a need for newer and larger properties. Instead of buying existing homes, they are now entering into contracts with builders to purchase some of their inventory or to build new homes themselves. This quickly became known as that. known Build-to-Rent Market (BTR).
Robert Dietz, chief economist for the National Association of Home Builders (NAHB), estimates that BTR added about 12,000 single-family homes to its rental portfolio in the fourth quarter of 2020, up from about 6,000 in 2019. A total of 44,000 units were built for rent during the year.
These are Not individual houses hidden in suburbs, but whole new rental communities. Instead of entry-level, they’re typically two to four bedrooms, many with patios, 10-foot ceilings, and high-end finishes.
Even if the pandemic (hopefully) seems to be easing, there are no signs that the BTR market is doing the same. Les Shaver writes in Globe.St that a new partnership between Invesco Real Estate and Mynd Management plans to invest $ 5 billion in the purchase of 20,000 single-family homes over the next three years. Walker & Dunlop Investment Partners estimates the single-family home market to be worth $ 3.4 trillion, according to Shaver. For comparison, the entire multi-family market is valued at $ 3.5 trillion.
Globe.St’s article quoted Sudha Reddy, director of Haven Realty Capital, a group that has partnered with home builders to purchase homes. “SFR operators like Haven can be a great sales channel for home builders willing to sell an entire rental community to one buyer rather than numerous individual buyers. This type of transaction can shorten the total holding time for a contractor as operators can typically purchase stages of homes more quickly as individual buyers can buy phases of houses. ”
Commercial mortgage-backed securities (CMBS) issuance has increased with this activity. Emissions in the single-family rental sector doubled to $ 8.3 billion last year despite the pandemic that hampered other asset classes.
While Wall Street’s entry into the single-family home rental business me were welcomed, their continued presence is less so. The National Association of Realtors’ chief economist, Lawrence Yun, has frequently cited their holdings as one of the reasons for the severe shortage of housing stocks. Back in 2017, Fannie Mae announced a “pilot program” in which it provided a $ 1 billion mortgage and sparked a storm of protest from NAR and housing advocacy groups. Fannie Mae quickly scuttled the program.
Accepted Concern, concern Because of the lack of new build, especially in the entry area, Yun and others will not be pleased to hear about the recent activity of home builders. Toll Brothers is investing $ 60 million in single-family BTRs in a joint venture with BB Living, initially in Boise, Dallas, Texas, Houston and Jacksonville, Florida. ECR Homebuilders is also going public in Florida hoping to raise $ 100 million for 1,000 BTRs.
The first project by DH Horton’s new subsidiary, DHI Residential is now online near Charlotte, North Carolina. Harrison Trace’s homes will have three to five bedrooms, 2.5 to three baths, range from 1,360 to 2,368 sf, and rent for just $ 1,745 a month. They have smart home tech features, stainless steel appliances, and a garage for a car or two.
It’s not clear where this is going. Builders can choose that doesn’t like landlords and save in a few years, though given the communal form of these houses it may not be easy to sell them individually. The rapid entry of so many companies into the sector can lead to oversupply and falling profits. In the short term, however, BTR is unlikely to bode well for new home portfolios.