Institutional investment in SFR properties on the rise

A new analysis by Yardi Matrix found that institutional investment in single-family rental (SFR) housing is on the rise and is expected to grow over the next eight years.

According to Yardi Matrix’s SFR database of projects with 50 units or more, more than 25,000 units are under construction, with nearly 4,300 delivered in the first half of 2022, and the industry is expected to surpass 2021’s record 7,705 deliveries .

However, rising interest rates are forcing investors to reevaluate the most effective strategies for growing portfolios and may contribute to lower short-term returns. Just last week, Freddie Mac reported that the 30-year fixed rate mortgage (FRM) fell from 5.54% to 5.30%, but that amount is dramatically higher than the annual rate of 2.80%.

According to various reports and news articles, institutions have committed more than $60 billion to purchasing single-family homes in the past year.

“Rising housing and mortgage costs in the second quarter of 2022 have increased the cost of capital for institutional buyers, so growth in the segment is likely to slow and returns to decline. However, the industry is benefiting from strong long-term demand drivers and explosive growth in institutional capital,” say Matrix analysts.

The Yardi study, “Rental Construction Fuels Growth in Institutional Single-Family Rental Markets,” was authored by Yardi Matrix Vice President and General Manager Jeff Adler, Director of Research Paul Fiorilla and Research Analyst Casey Cobb.

A recent study by MetLife Investment Management (MIM) estimated that institutions own about 700,000 single-family rental units in 2022, roughly 5% of the 14 million SFRs nationally.

MIM also predicts that by 2030, institutions will increase SFR holdings to 7.6 million homes, more than 40% of all SFRs.

Institutional portfolio growth is currently focused on projects for rent (BTR) or acquisition portfolios from smaller owners. BTRs are on track to deliver far more units in 2022 than in any previous year. More than 25,000 units are under construction, with nearly 4,300 already delivered in the first half of 2022, meaning the industry will easily surpass 2021’s record 7,705 deliveries.

“The SFR industry is facing challenges. A higher cost of capital and a weak sales market will reduce growth. SFR companies must effectively manage capital expenditures and maintain employment levels,” Fiorilla said. “And there are growing concerns about regulation that would limit investor home purchases, as some advocacy groups blame the institutions for rising home prices.” These accusations make no sense given the scale of the industry relative to the housing market and the long-term shortage of housing supply that is the main cause of the surge in housing prices. However, Congress has held hearings on institutional home ownership, so the industry needs to be vigilant.

A recent analysis of institutional home buyers and their impact on single-family properties by the National Association of Realtors Research Group found that this buyer segment will make up 13% of the home sales market in 2021, as the average purchase price of institutional buyers is an average of 26% lower than the average purchase prices in the states.

“However, the bottom line is that the industry looks fundamentally sound and poised for growth,” Fiorilla added. “Home ownership is likely to be in a tight spot over the next year or two as home prices reset and mortgage rates remain at recent higher levels, but that should be good news for single-family rentals.” Families still strive for the amenities that single-family homes provide, and if they can’t afford to buy, they will rent. What’s more, the supply of single-family homes is likely to remain weak as supply chain issues delay materials, development and labor costs skyrocket, and the permitting process slows supplies. The annual number of new housing starts fell 14% between April and June, moving in the wrong direction as the US faces a long-term shortage of housing units estimated at two to four million. While the housing shortage is unfortunate on many levels, it improves the investment outlook in the SFR market.”

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