What opportunities lie ahead?
For the real estate market, the pandemic has revealed underlying weaknesses in some otherwise dependable investments and surprising strength in others. The single-family rental (SFR) market, in particular, has proven to be exceptionally resilient.
Cautious Optimism in April
As the COVID-19 crisis dawned, industry participants were cautiously optimistic during their first quarter earnings calls. Rent collections in March were better than many had expected, with April trending positively, in some cases north of 95% of originally scheduled rent collected. By May, consensus was that the market was buoyed by the unusual circumstances. With much of the country under lockdowns and “stay-at-home” orders, people were looking for socially distant alternatives to apartment living.
Others needed more space so they could work from home.
Like any industry, the SFR market was braced for short-term pain, but these and other factors were enabling the SFR market to withstand the COVID-19 headwinds. The question remained, “Would it last?”
Today, the answer is an overwhelming “yes.” Applications for rental leases are continuing to break year-over-year internal records, and rent collections are even stronger now than they were at the outset of the pandemic. Clearly, there must have been something right about these rental properties because people are continuing to seek them out. And investors are taking notice.
Since the beginning of the year, there have been six new SFR securitizations, four of which have closed or come to market with industry acceptance since the beginning of the COVID-19 crisis. In an uncertain world, SFRs appear to be a haven in the real estate market. More importantly, SFRs have proven their resiliency to become a stable and mature asset class suitable for long-term investors.
Why the Continued Boom?
The strength of the market cannot be attributed solely to public sector action in the wake of the pandemic. In April, there were no checks from the government or protection for renters from eviction. Instead, SFRs have been benefiting from a persistent imbalance between the stagnant supply and mounting demand for homes.
Despite the recent spike in unemployment due to the pandemic, the job market, in the wake of the 2008 great financial crisis grew to levels that had outstripped new housing starts. In 2019, there were 2.1 million new jobs created in the country and only 1.2 million new homes built.
At the same time, according to Gary Berman of Tricon Residential, “the pandemic is driving people to prioritize health and working from home, preferably in the suburbs.”
Invitation Homes did just that and found that about 30% of survey respondents who moved into homes in April and May did so from denser urban areas, and approximately 30% said COVID-19 increased their desire to live in a single-family home versus an apartment or a town home.
SFRs Are an Asset Class
The strength and resilience of the market is making investors reconsider SFRs, not as a lucrative trade, but as a safe and rapidly maturing asset class in its own right. And because the SFR market has weathered the pandemic stress test better than nearly every other real estate asset class, it makes sense that money in search of safety and long-term potential is now flowing in.
Part of the maturing process is that institutional owners have become highly effective landlords and property managers. The money that has been flowing into the market has been put to good use to build the sophisticated back office infrastructure necessary to manage hundreds and thousands of properties across multiple geographies. Tenants are taking notice. They appreciate that with an institutional landlord they should expect repairs to be made quickly and professionally, spaces will be clean and decontaminated of COVID-19, and there is far less chance the owners will go bankrupt.
As a result, large institutional owners are getting larger. Invitation Homes now manages upward of 85,000 properties. Another major SFR market player has said its ambition is to manage a half million homes. And why not?
As massive as that figure is, it’s not as eye-popping as it seemed even last year. After all, with 17 million rental properties available in the U.S., and the market growing with strong tailwinds, it’s not unreasonable to imagine an institution with 1 million or even 2 million properties under management.
There is nothing holding the market back, and it seems the only thing that could trip up the big players in the market is a misstep of their own making.
Long Past the Financial Crisis
The world is a very different place now than it was during the financial crisis of 2008. Then, the housing market collapsed under the weight of massive oversupply and
a drought of credit. Savvy and courageous investors stepped into this unforgiving landscape and bought properties with the hope that the market would one day clear.
By the time Invitation Homes was founded in 2013 plenty of opportunities to buy overlooked properties remained. In fact, companies like Invitation Homes and others were instrumental in stabilizing the housing market and making it strong enough to withstand another 2008 downturn.
Five months into the COVID-19 crisis, we have not experienced the equivalent real estate catastrophe that followed the 2008 financial crisis; however, there are some clouds on the horizon. For instance, what happens when the Federal Housing Finance Agency (FHFA) foreclosure and eviction moratorium expires? Could that spark a cascading crisis as in 2008?
Thanks to the strength of the SFR market, there is now a powerful institutional backstop and plenty of new knowledge and capability available to buy, rehab and rent distressed properties.
Where Do We Go from Here?
If there was any overlooked value left in the market at the beginning of 2020, the COVID-19 crisis has cleared it and then some, leaving the industry at an interesting inflection point. It’s become a difficult time to be a buyer. The players who built this industry with an aggressive buy strategy now face a challenge of deciding which markets, if any, are the right places to buy right now.
Companies that grew in more opportune times using a “fix-and-flip” approach are now finding it more difficult to find good values. The lockdowns have upended their original business model and put pressure on the supply chain of contractors and appraisers that supported it. In response, some companies are creating their own opportunities. American Homes for Rent is using a “build-to-rent” model to manufacture supply at an affordable cost, and smart money partners are eager to help them.
After signing a $625 million joint venture with the company in May, an executive at J.P. Morgan Asset Management explained this opportunity to capitalize on the flight of city dwellers to the suburbs. “The move toward more spread-out living is also expected to accelerate in the wake of the COVID pandemic,” he said. “And we anticipate strong occupancy and rental growth rates across properties.”
Onward and Upward
The market for SFR was strong and growing in the years leading up to COVID-19 and showed remarkable resilience as the crisis unfolded.
Today, the sector is attracting new money as evidenced by formation of new joint ventures, equity and dividend offerings, and the oversubscribed reception to the recent securitizations. The asset class and its institutional participants are no longer the new kids on the block.
Just as in 2008, when bold moves were made to stabilize a rocky real estate market, today SFRs are standing tall as a bellwether in this storm. Smart money may see no better haven in SFR real estate based on the performance of these assets and the financially capable, sophisticated operators managing them. With adversity in the rear-view mirror, what opportunities are there ahead for the SFR market? Only time will tell.
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