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Keeping Up With Demand

This piece originally appeared in the May 2022 edition of DS News magazine, online now.

Last month, the Five Star Institute once again hosted its semi-annual Single-Family Rental Summit at the Statler Hotel in Dallas, Texas. With ongoing housing issues such as soaring home prices, lagging housing inventory, and widespread supply-chain issues driving many potential homebuyers to continue renting, or to continue renting longer, the single-family rental (SFR) market is flush. With recent SF rent price increases reaching near 15-year highs, increasing nearly 13% year over year in January 2022, single-family homes are a top-tier investment opportunity, as well as a housing alternative more Americans rely on as the competition within the homebuying landscape remains fierce.

With the Single-Family Rental Summit bringing together investors ranging from mom-and-pop to large institutions, DS News’ team was on hand to speak to some of the subject matter experts who were in the crowds and on panels for the event.

The event kicked off with a keynote speech from Jeffrey Tesch, CEO of the SFR Summit’s Host Sponsor, RCN Capital. Citing data from the U.S. Census Bureau, Oxford Economics, and Green Street, Tesch noted that, of the 125 million households in the United States, approximately 35 million are SFR rentals, representing around 16 million units. Looking ahead over the next five years, Tesch forecast housing demand to increase by approximately 7.5 million additional housing units. Within that five-year period, he predicted that approximately 810,000 new households would sign SFR leases—approximately 1.5 times higher than the number of predicted new apartment renters.

Of course, every opportunity must also overcome its own headwinds, and Tesch’s keynote laid out some of the challenges SFR currently faces, ranging from rising interest rates and inflation to persistent inventory shortages exacerbated by supply-chain and labor issues. Noting recent ATTOM data, Tesch also noted that homeownership remains more affordable than renting in nearly 60% of U.S. markets. However, Tesch spotlighted increases in new home construction in the early months of 2022 as a positive sign that some relief could be on the horizon.

Tesch’s keynote also pointed out increasing interest in the build-for-rent model as another way the industry is pivoting to both address current challenges and unlock further opportunities.

As the day gave way to a packed lineup of panels featuring industry subject matter experts, DS News spoke with many of those presenting. This month, we are excited to bring you a selection of insights from those conversations.

Jeffrey Tesch
Host, 2022 Single-Family Rental Summit
CEO, RCN Capital
Jeffrey Tesch is responsible for overseeing the operations of RCN Capital, including sales growth initiatives, underwriting review with compliance oversight, and leadership of senior-level strategic planning. Joining the Company in 2010 as Managing Director, Tesch led efforts to develop a national brand in private lending with the best practices and transparent products for a diverse customer base. Since RCN’s inception, Tesch has personally overseen over $3 billion in originations. His previous real estate experience was as an investor in both commercial and residential properties, ranging from single-family homes to commercial retail centers. He currently serves as a member of the American Association of Private Lenders’ Ethics Advisory Committee and as an Advisory Council member for the National Private Lenders Association.

What is the current state of the SFR marketplace and what do you see changing?
As a lender, we're always concerned about value, right? We want to make sure that the customers aren't overpaying, we want to make sure that, from an SFR perspective, depending on economic conditions, they're going to be able to service their debt. So, there's been a lot of talk today about appreciation in asset values, but also, appreciation in rents. Rents have gone up nearly 20%. This morning, in the room, I asked the question of the audience, how many of you been able to raise rents? And it was maybe 20% of the room. When really, every hand should've gone up.

How is the SFR sector utilizing technology in new ways?
We have way more data to make our decisions, especially MSA-specific data. We want to know that our borrower is paying the appropriate price for the asset and that they're going to be able to cover the debt service by being able to get that MSA-specific data. I know where the current trend lines are in a set value, where they're projected to go, as well as the projective rent. MSA-specific data for a lender is huge, and it's made a big difference. Yes, we still get valuations, but it's the data behind the valuation that makes the difference.

Do you think the changes and challenges of the pandemic have made it possible for more "mom-and-pop" investors to enter the SFR sector in recent years, whether it’s from increased tech access or just people looking to change careers or income streams?
Oh, without a doubt. But the reality is, the majority of the single-family rental industry is owned by small, individual investors. It's important to make them aware of new solutions, new tech, even leverage. I'm in the leverage business; I make mortgages. It’s about understanding the power of leverage for somebody who wants to make that shift from a W2 job to a more passive income job. We spend a lot of time educating on leverage.

What have been your key takeaways from this year’s conference?
For me, my whole life is mortgages, right? That's all we worry about is making loans. In the past—really, since January 1, with the increase in interest rates—as a lender, we've been very concerned about the customers adapting to the new interest rate environment. Even though the reality is, pre-pandemic, this is exactly where we were, and we were never busier. Investors were building up portfolios at a breakneck pace. Then the pandemic came, and it really threw gasoline on the fire. But then the interest rates crashed, which was wonderful for our investors.

So now, we've done a complete reset. Going into this conference, I was expecting to hear a lot more wringing of hands and concern about interest rates. While there was concern from the investment community, it wasn't nearly as pronounced as I expected. These investors have a plan. Most of them understand that interest rates are going up and have gone up, and they still plan to build out their portfolios in that new environment and just adjust whether it be the return on investment or the debt service coverage ratio. They're adapting, and I've walked away from this conference feeling like it's game on.

Do you foresee any possible headwinds on the horizon that could hamper the SFR investment sector’s growth in the future?
It's the margins getting squeezed because of the shortage of assets available for purchase. Anybody that's selling a house knows it's worth a lot of money. Those margins are getting squeezed with the higher cost of money. I came away from this event not as concerned about that, but I can't put my head in the sand. The houses will become less affordable to build out your portfolios if you pay twice as much in interest as you paid six months ago, and everybody knows what their house is worth. There are very few bargains out there, so that's a concern for me.

Stuart Denyer
Co-Founder and CEO, New Western
Stuart Denyer co-founded New Western in 2008 with his business partner, Kurt Carlton. Together, they revolutionized the way residential real estate is bought and sold. In his current role, he works with the leadership team to make strategic decisions with the portfolio of companies. He also manages various departments within each brand and oversees company resources. Originally from England, he came to the U.S. in 2001 to work in commodities trading on the Chicago and New York Mercantile Exchanges. Denyer received a bachelor’s degree in business and management studies from St. Mary’s University in London. He also has his real estate and mortgage licenses.

What does the state of SFR look like right now?
There's plenty of opportunity in this space. What we are finding is that, if you are a single-family buyer, mom-and-pop type investor, semi-professional, essentially not institutional, moving just outside of the city seems to be ripe for opportunity. Also, build-to-rent; I don't see that that's going to fall away. You're going to have obvious issues with supply chain, but from a mom-pop perspective, there are patches of land that just aren't big enough for the institutions to consume.

How has the SFR sector weathered the pandemic, and what lessons have you taken away from it?
Remarkably robust. Government intervention has helped very much, but single-family desperately needed some technological innovation. That came from multiple different sources, and I think that helped enormously with all these road bumps acting as accelerants. The pandemic showed how the industry could manage, and it was able to manage the processes. It showed there was resilience. Interest rates had a big hand in helping, but for the most part, it seems like it's been very resilient to most things that have been thrown out over the years, and has been assisted greatly with tech.

Could you speak more about how technology is driving SFR?
The ability to qualify and quantify who you're working with as far as a contractor has been improved greatly by technology. Also, the ability to locate and isolate inventory has taken a huge step forward with the introduction of big data—this data really wasn't available before. You used to have to open an MLS book to find out about houses or head to the county and search through public filings.

When the big institutions came in and they cleared out the courthouses and were able to pay so much more than your local real estate investor, they understood that there was going to be this steep appreciation for the next however many years. This allowed them to say, "Let's just get a whole bunch of supply right now because we know that, even though we may be paying about 10% above market right now, and everyone's saying we're mad, the market's eventually going to appreciate 20%." That thinking, that mentality, that data—all of the tools, it's been very powerful for the semi-professional who has been able to replicate these behaviors and apply these processes to meet their individual needs.

I think we'll see far more cohesion between Main Street and Wall Street moving forward, far more relationship- and partnership-based activity. I think that'll be to the benefit of both sides of the house, with tech enabling rather than tech prioritizing.

Looking ahead to 2023-2024, what do you anticipate for the SFR sector?
The issue of the supply and the demand is not going anywhere. I don't see how that gets fixed, at least not in the short term. Based on those fundamentals, it's hard to write off SFR. Will there be issues, are there headwinds? Sure. But if they do make all the interest rate hikes we anticipate for this year, they'll probably overcorrect and then adjust next year to balance any hikes that go too far. But as long as the issues remain with supply and the demand, there’s going to be a lack of housing, particularly affordable housing, Buy, fix, and rent is going to continue; whether it keeps chugging along the pace it's going, I'm not so sure, but this market is here to stay.

Joe Hullinger
President, Finance of America Commercial
Joe Hullinger leads Finance of America Companies’ commercial loans division, which helps clients overcome traditional financing hurdles and build long-term wealth through real estate investment. Since the launch of Finance America Commercial in 2017, Hullinger has been integral to the organization’s numerous successes. An accomplished executive with more than 35 years of mortgage industry experience, Hullinger has a history promoting substantial growth and profitability for mid-size and Fortune 500 mortgage banking institutions. He has managed start-ups and built highly effective sales and operations divisions from the ground up. Hullinger is known for his skill around recruiting, training, and managing multisite operations staff. He previously held leadership roles at Genworth Mortgage Insurance, BNC Mortgage, Fieldstone Mortgage, and American Mortgage Solutions.

What is the current state of the SFR marketplace?
Investors are running full steam ahead. Historically, investors accounted for 27% of home sales. According to John Burns Real Estate Consulting’s March Market Overview, today this has increased by 6%, with one in three homes now purchased by investors. Although some growth can be explained by institutional involvement through instant buyer or “iBuyer” programs and SFR Real Estate Investment Trust acquisitions. However, smaller investors with fewer than 10 homes account for 27% of all purchases—more than four times that of larger investors with more than 10 homes. Investors of all sizes are recognizing the inflation hedging strengths of real estate investments. At Finance of America Commercial, we cater to both small and large investors and have several different solutions available for those investing in the SFR marketplace. Increased investor appetite and higher owner-occupant demand since the pandemic continue to drive the low-inventory competitive marketplace we see today.

What are the headwinds and opportunities you’re seeing?
The cost of everything is going up, but the speed and timing of each component leaves us with a mixed bag of results. Yardi Matrix, a market intelligence tool, reports that rents for the average single-family unit in the United States rose in March, but overall annual growth has decelerated to 14.1%. The higher rents and high home price appreciation have provided excellent returns for existing portfolios, but the pressure on property values has compressed capitalization rates for the SFR industry which now sit around 6%. Rent growth has been unable to keep up with home appreciation in most markets. We expect that lagging rental growth, coupled with the recent substantial rise in interest rates, may cool certain markets and cause downward pressure on rent increases, value increases, or both. Given the anticipated runway for rates, investors will have to carefully consider their investment decisions. Notably, industry analysts believe that investors appear to be maintaining reasonable levels of debt and are putting equity into the purchases of homes, so the financing and approach investors are taking is different from what we saw with the highly leveraged investors in the 2000s.

How has the SFR sector responded to the challenges presented by the pandemic?
The number of capital providers and operators in the sector has increased substantially given the increased demand over the past two years. As businesses and pipelines shut down due to lockdowns introduced in response to the COVID-19 pandemic, many noticed the historically high occupancy levels and rent growth leading in the SFR space. The pandemic and related shocks have further highlighted the lower volatility and risk rated returns of SFR. Finance of America Commercial is focused on helping our clients overcome traditional financing hurdles and build long-term wealth through real estate investment. By providing a wide range of innovative lending products—including fix-and-flip property loans, bridge loans for temporary real estate assets, new construction loans, and single and portfolio rental term loans—we’re able to offer solutions tailored to the different types of SFR investors.

How is technology changing the way you do business in 2022?
Most in the mortgage industry today are attempting to use technology efficiently. An industry that has historically been a slow adopter of technology has seen huge jumps in development and adaptation recently. Appraisals, inspections, and closings can now happen without being physically present. Additionally, property acquisitions and property management can now be accomplished via third-party websites or apps, increasing an investor’s ability to expand in various geographic areas at once. Technology systems have created a fast and comfortable environment for borrowers and businesses to increase their speed of execution. However, at Finance of America Commercial, we believe that technology should enhance the home financing decision-making process for borrowers, not replace it. Our lending products and tools are designed with the customer at the center, so we can efficiently connect with our customers and provide the personalized service they want, when and where they need it. We see real value in continuing to provide guidance and expertise in the form of human touchpoints, so we can help ensure positive outcomes for our customers.

What do you anticipate 2023 and 2024 will look like for SFR?
For Finance of America Commercial specifically, we’re focused on continuing to serve our existing customers to ensure they can grow and scale their business as they desire. We’re also looking to expand our reach to new customers. We’ve continued to maintain strong relationships with real estate investors and expanded to focus on independent mortgage brokers. Now, we’re seeking to leverage additional opportunities to work with our colleagues at other Finance of America businesses and help existing Finance of America customers pursue real estate investments.

For the industry at large, I think we will continue to see growth given the strong housing fundamentals, but as we have already seen, the growth will not accelerate at the same levels we’ve seen over the past few years. SFR will remain a target for investors with the pace of renter growth expected to double that of homeowner growth from 2020-2040. From a macro level, to meet this huge demand, we will need to increase the supply of housing. Multifamily and residential permits appear on pace to keep up with demand and should see substantial growth through 2024. Scarcity will be a big driver in SFR as tight inventory and supplies continue to push consolidation and institutional involvement in the industry. We expect that SFR operators will utilize efficiencies from consolidation in a similar way that national builders have in recent years to gain entry to new markets and optimize operational costs in a tightening market.

Michael Jansta
CMO, Altisource
Michael Jansta serves as Chief Marketing Officer of Altisource. Previously, he led the marketing team of the online real estate auction platform Hubzu.com, a business unit of Altisource. Since 2006, Jansta has facilitated over $45 billion in closed sales by bringing sellers and buyers together in residential and commercial real estate auctions. His passion is creating data-supported technology solutions to better market and enable transparency in real estate transactions.

What can you tell us about the current state of the SFR marketplace?
The market is strong for SFR. There's so much demand, especially for investors who are willing to look around the corner and outside their markets, or even outside their traditional markets. Some of these markets, there just isn't a lot of inventory or opportunity, but that doesn't mean that the market's dried up. There are places all over the country and that's where data comes into play.

The headwinds I see are tied to inventory in those markets, but also price appreciation everywhere. Prices have been going up everywhere, but so have rents. And interest rates have climbed up, but they're not that high yet. The first house I bought in 2000 was at an 8.25% interest rate. My parents, when they bought their house in 1972, it was 12.5% interest rate. Now, the price point was $26,000, but the economy of scale was a lot different at that point. But when you look at the data, when you look at prices, and in certain markets and the rents that are for following them, there's so much growth in the South, the Southeast, and parts of the Midwest.

Altisource isn’t just looking at the MLS data and market data that's provided by the government. We also look at proprietary sources like rent range data, which is one of our business units that tracks rent information and what's happening in these markets dynamically, day-to-day. You see which markets have inventory that is coming into play.

How is tech transforming SFR in 2022?
I hate to use the phrase “democratization of data,” but there are so many data sources right now, and the data's getting cheaper and cheaper. We aggregate 20 or 30 massive databases into the calculators that are on Equator.com, so an investor can just go right in, look at a property, and say, "Is this a good investment as a single-family rental?" We pre-populate those calculators with valuation information, rent information, and tax information.

That's an enormous amount of data and valuable data that's just out there for free, for an investor to use on Equator.com. We provide that because we have the agent network that can help those investors acquire properties. That just wasn't the case in the past. You'd be able to find what was on the market or what was not on the market, or you'd find some photos and some property DNA, and that was it. Now, we're able to provide so much more so that you can feel more comfortable expanding geographically.

That ability to have real estate properties, even as a mom-and-pop investor, in other states, you're able to do that because of FaceTime, because of all the data at your fingertips, property management companies, all the contractors, and the transparency that comes with these platforms. It opens the opportunity for investors to create portfolios, or even just acquire single properties in other states. You get better economies of scale if you have multiple properties and a team that's managing them, but we do have a lot of investors that buy one or two properties a year, and they're still able to do it in today's market with prices up and interest rates up. It really comes down to, "How do you find all those needles in the haystack to make a needle stack?"

Cameron Paine
VP, House Canary
As a top executive with two national brokerages, one of the largest MLSs in the country, and with Apartments.com, Cameron Paine’s expertise encompasses the essential elements of organized real estate. Paine has also served on the Zillow, Trulia, and Realtor.com advisory boards. In 2014, Paine founded the Broker Public Portal, the national broker and MLS collaboration. After spending several years in Florida heading up the Bonita Springs-Estero Association of Realtors, in 2006 Paine was recruited to be the founding CEO of the Connecticut MLS. In 2017, he engineered the merger to create SmartMLS, one of the top 20 largest MLSs in the U.S.

What can you tell us about the current state of the SFR marketplace?
Everything we are seeing looks like 2022 is going to be at least as good as 2021, which was a record year in terms of SFR construction. Almost 14,000 units were built specifically to rent. It's double 2021's numbers, and it's almost triple what was done in the space between 2016 and 2020. So, we feel like 2022 is positioned really well. Any of the headwinds that might be out there—for instance, rising interest rates, etc.—while they may affect single-family home sales, in terms of individuals who are looking to buy a property, it raises the expense for them.

For the specific markets where SFR is strong, we think it doesn't change anything. We think it may actually take a few of the individual investors out of the market and leave that space open for institutional investors.

Do you think pandemic factors such as increased migration are helping drive increased build-for- rent activity or is that down purely to continued housing demand and insufficient inventory across the board?
Yeah. I think that was one of the factors. Certainly, when people are looking to move jobs or be flexible, they aren't sure where their next job is. They aren't sure if the town they move to is where they want to live for the rest of their life. So, they're maybe unwilling to buy. But I think there are other factors as well, including the ability for any investor, from a single person all the way up to institution investors, to be able to continue to identify properties on a local, regional, and national scale. And then, through the rental process, to gain some tax advantages, but also to be able to gain the best rental income possible from the markets they've located through HouseCanary or other services.

Beyond just the increased access to relevant data for investors, how else is tech transforming the SFR space this year?
I think the friction experience is the number-one thing in terms of the end-to-end transaction. Where people are recognizing, if we are going to expand, if we're going to scale, we need the right data. We need the right valuations. And we need to be able to do this in a kind of seamless way. We can't be patchworking data from multiple different sources. It's too much. Overall, that's the story, being able to pull in more accurate data, more accurate valuations in a single location and to be able to get a global picture of what the market actually looks like.

How are ongoing affordability and inventory issues impacting SFR investment?
So, I'm going to answer that from an oblique angle. The ability for any investor to be nimble is going to be critical. I don't know if you're familiar with the term target fixation, but it's where fighter pilots are so fixated on shooting down someone that they fly into the side of a mountain. They lose situational awareness. That's going to be the key for our investors: when they're in a market and they've invested the time, money, and effort to be in that market, there's also going to come a point where that market is just too competitive, and they need to look elsewhere. And if they don't have the national footprint for the data to be able to look elsewhere, that's going to be one of the things that narrows their field of vision. And to the fighter pilot analogy, that takes away their situation awareness because they don't have a bigger picture.

Gagan Sharma
President and CEO, BSI Financial
Gagan Sharma is a seasoned entrepreneur and executive with 20+ years of experience in financial services and technology. He enjoys solving challenging customer problems in the financial sector and has a proven track record of bringing startup concepts to life and scaling for success. Since leading an investment group to acquire BSI from a bank in 2006, he has transformed the company from a small loan servicer into a fast-growing and leading nationwide mortgage fintech, fostering a 70x growth since the acquisition. Prior to BSI, Gagan dropped out of The Wharton School to start, scale, and sell a successful global financial services and technology outsourcing company. Sharma has an MBA from The Wharton School at The University of Pennsylvania and a B Tech from the Indian Institute of Technology, Delhi.

What is the current state of the single-family rental marketplace and what are the headwinds and opportunities you're seeing?
From our perspective, within the SFR marketplace, the biggest change that is clearly happening is the change in the interest rate environment. Because of inflation, rates have risen and we are seeing our clients raising rates. The markets still have a significant appetite for loans and assets focused on the single-family rental side. That is probably the biggest risk that we see. Inventory shortages are an ongoing thing. It's hard to tell what this change of rates does to buyers and sellers.

The assets that many of the investors are buying, they're competing oftentimes with the homebuyers as well. So, that's a little harder to tell as to how exactly that's going to impact the flow of inventory. But from a lending perspective, we see activity is still quite high.

How have the pandemic and technology changed in the way you do business in 2022?
One is using digital to provide a better consumer experience. The consumer experience could be the end renter, the borrower, the consumer who is renting the property, or it could be the investor who owns the property. Everything has gotten so much more digitized, especially over the last two years. The last two years have seen an acceleration that would have otherwise taken five or seven years unfold in only two years thanks to the pandemic. Everybody was forced to do things in a much more virtual manner, so that led to an acceleration of a lot of trends.

The other thing that I would say is there is a lot more data and information available. Even the small to mid-sized investors are able to access information and be smarter about how to make investment decisions and where to make investment decisions.

What do you anticipate in 2023 and 2024 for the SFR sector?
The way I would think about it is, it's an evergreen asset. There is going to remain a significant demand for single family rentals. The consumer wants rental housing, so that’s going to continue to be there. We know interest rates are going to be higher. Investors that have adequate cushion built into their operating models, will be fine. What we don't know yet is, will the rising rates push the economy into a recession? If we have a recession, then it's a very different market. We don't know yet as to where that is going to end up at, but otherwise I feel this asset has gone through so many different recessions and ups and downs because the consumer demand is there. And it'll always be there.

About Author: Eric C. Peck

Eric C. Peck has 20-plus years’ experience covering the mortgage industry, he most recently served as Editor-in-Chief for The Mortgage Press and National Mortgage Professional Magazine. Peck graduated from the New York Institute of Technology where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career with Videography Magazine before landing in the mortgage space. Peck has edited three published books and has served as Copy Editor for Entrepreneur.com.
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