Investor Strategies Advance in Roaring Single-Family Rental Market
Real estate investment and management companies are still hungry for single-family rental properties, with some firms going upstream and buying nonperforming loans to meet their acquisition goals.
In late June, Starwood Waypoint Residential Trust purchased a pool of 1,440 nonperforming loans for a purchase price of $117 million, according to analysts at Keefe Bruyette & Woods. They estimate that Starwood acquired 1,797 properties in the second quarter, bringing its rental portfolio up to 8,992 properties at quarter-end, including loans converted to real estate owned and property sales.
Another fast-growing company, American Homes 4 Rent, acquired 2,200 properties in the second quarter, after purchasing 2,237 properties during the first three months of the year. As of June 30, American Homes had a portfolio of approximately 27,700 properties, according to the July 27 KBW report.
Single-family rental companies seem to be benefiting from the foreclosure crisis, tight mortgage credit and the dearth of first-time homebuyers. But affordable housing advocates are raising concerns that these rental companies are pushing up rents to unaffordable levels, while leaving fewer opportunities for people to buy homes. They are calling for government oversight to prevent another housing bubble.
"Purchasing a home has become much more difficult for non-investors in recent years and more families are becoming long term renters. With lower incomes, tighter credit markets and investors willing to spend cash and purchase multiple properties with the intent of renting them, families looking to purchase a home are at a disadvantage," wrote U.S. Rep. Mark Takano, D-Calif., in a white paper, "Rent on the Rise in Riverside," published in January.
"Large investors can be more attractive to sellers, because they’re able to purchase homes with cash, rather than financing the purchase through a mortgage," wrote Takano. "Competition from large investors and a low vacancy level make it more challenging for individuals and families to purchase a home of their own."
The white paper goes on to express concerns about securitizations backed by rental property portfolios and investors' ability to keep large portfolios of properties well-maintained.
But the tide may be turning for some rental companies, and some single-family rental firms are selling homes because of high vacancy rates and concerns about the slowdown in house price appreciation, said Lynn Effinger, executive vice president at ZVN Properties Inc.
"It isn't huge. But it is having an impact on the marketplace, particularly in areas where these big institutional investors bought up a lot of properties and propped up prices," he said.
The property manager also noted that some housing groups may have exaggerated the impact of the single-family rental firms and added that some companies are selling renovated homes because they are sitting empty, often financing smaller investors to help them acquire these properties.
The Keefe Bruyette & Woods report shows that some aggressive buyers have high vacancy rates. American Homes 4 Rent has an 82.6% occupancy rate on its total single-family rental portfolio and a 95% rate on its stabilized properties. Starwood Waypoint has a total portfolio occupancy rate of 77.3% and a 97% rate on its stabilized properties.
Initial vacancy rates of single-family rentals have been higher than expected, said Rick Sharga, an executive vice president at Auction.com.
"When someone buys 300 properties, it takes time to fix them up and find renters," he said.
Countering that trend has been renewal rates, as renters renew their lease. "The renewal rates have been higher than expected," Sharga added.
Realty companies that buy in bulk will also sell properties that don't meet their business model, or they might exit a market if market conditions change or they can't assemble enough properties to make it profitable. But that doesn't mean they're ready to give up on single-family property rentals altogether.
"I have no indication that institutional investors are getting ready to sell properties to cut their losses," Sharga said.
Realty companies that have been less aggressive buyers tend to have lower vacancy rates. Silver Bay Realty Trust Corp, which is currently buying 100 to 250 properties a quarter, has a 92% occupancy rate, according to the KBW report. Silver Bay has a portfolio of 6,000 homes.
Meanwhile, Colony American Homes has a 73% occupancy rate, which the managers appear to be addressing, according to the KBW analysts. "We expect Colony American's acquisition pace to have moderated and that ramping up renovation and lease-up capacity will drive improved occupancy." Colony owned 16,500 home as of May 5 with a 73% total occupancy rate.
In markets like Phoenix, Atlanta and Las Vegas that drew a lot of investor activity two or three years ago, there are fears that prices will crater as investors leave and turn their attention to new markets. But Sharga said that hasn't happened.
"What has happened is that prices have held, but the rate of appreciation has dropped pretty significantly," he said.
On Wall Street, bond investors still have an appetite for single-family rental securities. Blackstone Real Estate Partners is marketing a $720 million single-family rental pass-through securitization that is backed by 3,740 properties. Blackstone's Invitation Homes division currently has a portfolio of 44,000 single-family rental properties. Earlier this year, Blackstone sold a $1 billion single-family rental pass-through securitization.