Home, Sweet Home? Amid the coronavirus pandemic, residential REITs – particularly the traditionally countercyclical single-family rentals – should prove to be a source of relative shelter for investors.
Single-Family Rental REITs were born from the last economic crisis when a cascade of foreclosures enabled a new class of institutional rental operators to emerge by buying distressed properties en-masse.
Similar distress in the U.S. housing market is highly unlikely given robust underlying market fundamentals and the lingering housing shortage, but opportunities may still emerge for accretive portfolio growth.
Millions of renters will be impacted by coronavirus-related economic shutdowns, but the combination of direct cash infusions and enhanced unemployment insurance from stimulus measures should be a more-than-effective short-term bridge.
Fueled by the maturing millennial generation, the 2020s were already poised to be a decade of ‘suburban revival’ and behavioral changes in the post-coronavirus world could be an added spark.
This idea was discussed in more depth with members of my private investing community, iREIT on Alpha.
REIT Rankings: Single-Family Rentals
In our REIT Rankings series, we introduce and update readers to each of the residential and commercial real estate sectors. We focus on sector-level fundamentals, analyzing supply and demand conditions and macroeconomic factors driving underlying performance. We update these reports quarterly with a breakdown and analysis of the most recent earnings results.
Single-Family Rental Sector Overview
Amid the coronavirus pandemic, residential REITs – particularly the traditionally countercyclical single-family rentals – have been a source of relative shelter for investors and will perhaps prove to be a source of outperformance as the dust begins to settle. In the Hoya Capital Single-Family Rental REIT Index, we track the three single-family rental REITs (SFRs) which account for roughly $20 billion in market value: Invitation Homes (INVH), American Homes 4 Rent (AMH), and Front Yard Residential (RESI).
Single-family rental REITs comprise roughly 1-2% of the “Core” REIT ETFs. SFR REITs also represent 3% of the Hoya Capital US Housing Index, the benchmark that tracks the GDP-weighted performance of the US Housing Industry. As we’ll explain in this piece, single-family rental REITs – along with their residential REIT sector peers (Apartments and Manufactured Housing REITs) have been some of the most significant beneficiaries of the lingering housing shortage, producing same-store NOI growth that has been consistently above the REIT sector average for the past decade. Americans spend an estimated $1.3 trillion per year in direct and imputed rent and housing is the single-largest annual expenditure category for the average American at roughly 33% as measured by the U.S. Bureau of Labor Statistics.
Single-Family Rental REITs were born from the last economic crisis when a cascade of subprime foreclosures enabled a new class of institutional rental operators to emerge by buying distressed properties in bulk. The roughly $5 trillion US single-family rental market remains highly fragmented with large-scale institutional rental operators owning 250k out of the estimated 15 million SFR rental units across the US, or roughly 1.5% of the existing SFR stock. The average SFR owner manages just 1-2 properties and the average SFR monthly is $1,100 per month, but REIT portfolios skew towards the higher-end of the quality spectrum. The presence of institutional SFR operators this time around, interestingly, may serve as a downside buffer to home values if economic conditions were to deteriorate significantly.
Millions of renters will be impacted by coronavirus-related economic shutdowns, but the combination of direct cash infusions and enhanced unemployment insurance as part of the $2.2 trillion stimulus package should be a more-than effective short-term bridge. While the direct cash check gets much of the attention, the far more substantial benefit comes from the enhanced unemployment benefits, which amount to an extra $2,400 per month from the federal government through July 31 on top of the standard state unemployment insurance. Using the chart below from Bespoke Investment Group, we note that these benefits amount to between 75% and well over 100% of the previous monthly income for the vast majority of American households that lost their jobs from CV-19 shutdowns, measures that give renters few excuses to miss their monthly rent payment.