How the Great Financial Crisis accelerated the institutionalization of Single-Family Rental
The Great Financial Crisis was a major inflection point for Single-Family Rental investment, accelerating the institutionalization of this asset class
The single-family rental (SFR) market consisted of approximately 10.0 to 12.0 million units or 30% to 35% of the renter market share with landlords often owning one to five homes. Many transactions were between end-consumers, and institutions typically had only secondary exposure to SFRs. Institutional firms purchased other core real estate assets (multifamily, office, retail, and industrial) because acquiring and managing SFRs on a large scale was too inefficient.
The GFC resulted in a single-family mortgage default rate of over 8.0% and 4.0 million homes went into foreclosure. Many were purchased by investors at foreclosure auctions.
In 2012, the Federal Housing Finance Agency (FHFA) created the Real Estate Owned (REO) Initiative. This allowed private investors to buy properties in bulk as Real Estate Investment Trusts (REITs) if they rented the homes for a certain number of years. Several large firms (Invitation Homes, American Homes 4 Rent, Amherst, Progress Residential, and others) entered the market at an attractive entry point. They spent billions on tens of thousands of homes and their initial strategy was to sell some (or all) of them once the market recovered. Meanwhile, the properties generated a steady cash flow.
Investors purchased less than 7.0% of homes before the recession. This steadily increased during the recession and since 2011 more than one in 10 homes sold were bought by investors.
As the economy began its gradual recovery, several firms went public and allowed investors to get liquidity and access to the sector. Debt became available quickly and owners instituted professional property management either internally or contracted through a third-party provider.
Technology advancement increased the efficiency in purchasing, renovating, leasing, and managing properties and allowed owners to focus on increasing their operating margins.
Since 2010, the number of homes occupied by renters has increased at a faster rate than homes occupied by owners. The increase in demand for rentals is the result of job growth and migration patterns, changes in demographics, relatively flat wage growth, the large population size of the millennial generation, higher student debt, more restrictive single-family lending standards, and the cost of purchasing and maintaining a single-family home. Combined, these factors resulted in a change in the homeownership rate.
Historically low housing supply resulted in increases in home appreciation values and higher-rent command. Value appreciation led to several investors selling some (or all) of their inventory. However, the largest investors are looking to expand.
The SFR market has matured into a legitimate asset class because of predictable cash flows, stable returns, and solid rent growth. These characteristics are attractive to a wide range of investors and lenders and it is estimated that institutional ownership is between 350,000 and 400,000 homes. This amount is expected to continue to increase.
Read more about the growing institutionalization of the SFR space and how it has become a quickly desirable addition to a well-rounded investment portfolio in our white paper: Evolution of Valuing Single-Family Rental Homes.