A new analysis by Yardi Matrix has found that institutional investment in single-family rental (SFR) homes is on the rise, and anticipated to rise over the next eight years.
According to Yardi Matrix’s SFR database of projects with 50 or more units, more than 25,000 units are under construction, with nearly 4,300 delivered in the first half of 2022, and the industry is projected to surpass 2021’s record-high 7,705 deliveries.
However, rising interest rates are forcing investors to reassess the most effective strategies for growing portfolios, and may contribute to lower near-term returns. Just last week, Freddie Mac did report that the 30-year, fixed-rate mortgage (FRM) fell from 5.54% to 5.30%, however that total is drastically higher than the year-over-year rate of 2.80%.
According to various announcements and news articles, institutions have committed more than $60 billion to buying single-family homes over the past year.
"Rising home and mortgage costs in the second quarter of 2022 increased the cost of capital for institutional buyers, so the segment's growth is likely to slow, and returns will moderate. Even so, the industry benefits from strong long-term demand drivers and the explosive growth in institutional capital," say Matrix analysts.
Yardi’s study, “Build-to-Rent Fuels Growth in Institutional Single-Family Rental Markets,” was authored by VP and General Manager of Yardi Matrix Jeff Adler, Director of Research Paul Fiorilla, and Research Analyst Casey Cobb.
Recent research by MetLife Investment Management (MIM) estimated that institutions own some 700,000 single-family rentals in 2022, approximately 5% of the 14 million SFRs nationally.
MIM also forecasts 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 build-to-rent (BTR) projects or acquiring 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 were already delivered in the first half of 2022, meaning the industry will easily surpass 2021's record-high 7,705 deliveries.
“The SFR industry faces challenges. The higher cost of capital and weak sales market will reduce growth. SFR companies must manage capital expenditures efficiently and maintain occupancy rates,” said Fiorilla. “And there are growing worries about regulation that would limit investor home purchases, as some advocacy groups are blaming institutions for the increase in home prices. These accusations make little sense given the scale of the industry relative to the housing market and the long-term housing supply shortage that is the main cause of the spike in housing prices. Nevertheless, Congress held hearings on institutional ownership of housing, so the industry must be vigilant.”
A recent analysis of institutional home buyers and their impact on single-family properties conducted by the National Association of Realtors Research Group found that this segment of buyers comprised 13% of the residential sales market in 2021, with the median purchase price of institutional buyers on average 26% lower than the states’ median purchase prices.
“The upshot, however, is that the industry looks to be fundamentally sound and poised for growth,” added Fiorilla. “Homeownership will likely be in for a bumpy ride 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 aspire to the amenities provided by detached houses, and if they can’t afford to purchase, they will rent. What’s more, supply of single-family homes is likely to remain weak as supply-chain issues delay materials, development and labor costs skyrocket, and the entitlement process delays deliveries. The annualized number of new housing starts dropped 14% between April and June, moving in the wrong direction as the U.S. 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 prospects of the SFR market.”