As competition for existing SFR assets intensifies, investors increasingly look at development.
Capital pouring into the growing single-family rental (SFR) housing market is bumping up against a tough competitor—the consumer. Heightened competition amid a tight supply of housing inventory in many markets is pushing investors to shift strategies to focus on new development.
“What you’re seeing now is the maturation and scale in the sector, where it is really being viewed as a distinct asset class within the real estate sphere, similar to multifamily or data centers,” says Gary Beasley, CEO and co-founder of Roofstock, a marketplace for single-family investment properties. Along with the maturing of the SFR sector, the market has seen more capital, including institutional money, that is targeting single-family rentals and looking for a way to enter the space.
For example, Tricon American Homes announced a new $750 million joint venture deal last summer with the Teacher Retirement System of Texas and Singapore’s GIC to acquire and manage a portfolio of rental homes together. Each has agreed to contribute $250 million to a fund that aims to acquire between 10,000 and 12,000 new SFR properties. “I think you will see other groups like that partnering with existing players to put money to work and build portfolios,” says Beasley.
The challenge for investors is how to place capital in a market where competition for existing homes, and management inefficiencies of scattered property locations, is squeezing returns. The solution for many these days has been to shift their focus to development. Build-to-rent strategies tend to work well in markets where building and land costs are lower and where there is more entry-level home building, such as Atlanta, Charlotte, N.C., Phoenix and parts of Texas. “It doesn’t work well everywhere, but there are definitely some markets where the numbers pencil,” says Beasley.
SFR communities take shape
New York-based GTIS Partners started out buying older homes out of foreclosure during the housing crisis, renovating them and then renting them out. At its peak, the firm had aggregated over 4,200 SFR homes. Last summer, the investment group opportunistically sold nearly half of that portfolio to a private equity buyer in a $243 million deal. GTIS is one firm that has shifted its strategy entirely to investing in build-to-rent homes.
Over the past 24 months, the firm has been acquiring newly built rental homes from homebuilders in various subdivisions across its SFR target markets in the “smile” states in the southern U.S. “As prices in the housing sector went up, the pricing gap between new homes and older homes became smaller,” says Rob Vahradian, senior managing director and head of U.S. investments at GTIS Partners. Newer homes also have the advantage of more predictable and lower maintenance costs; the ability to tailor the design to renters and higher rentability.
Initially, investors found an entry point into new developments by buying up 20 to 30 homes scattered within a new subdivision. Oftentimes, developers were willing to sell at a discount—of 6 to 7 percent—because selling directly to investors eliminated their marketing costs. Homebuilders could also use those sales to kickstart a project and secure financing, or quickly close out a project that was fully developed. “So, it is profitable for the builder, as well as for us,” says Vahradian.
The next leg of evolution in the SFR market is building an entire community of rentals with 150 to 250 homes concentrated in one location with shared amenities and on-site management similar to that of apartments. For example, AHV Communities is developing two SFR communities in Austin, Texas that combined will include a total of 175 upscale homes ranging in size from 1,440 to 1,882 sq. ft. and offering three or four bedrooms.