Early Movers in Single-Family Rental, Berkadia Now Sees Keen Investor Interest
Although single-family rental is not a new concept, interest in this product type has mushroomed over the past couple of years, notably since the onset of the COVID-19 pandemic in March 2020. Connect Commercial Real Estate sounded out two experts in this sector from a firm with a lengthy track record of financing and selling SFR product, Berkadia. Here’s what Dori Nolan, SVP of national client services, and Mark Forrester, senior managing director investment sales, had to tell us.
Q: Berkadia saw a good amount of single-family rental activity prior to the pandemic, but it seems as though the pandemic has focused interest on the category. Are you finding that to be the case, and if so, what are some of the reasons that investors are focusing on SFR?
Mark Forrester: The incubator for this, to some degree, has been Arizona. We had very strong interest pre-COVID, but the universe of interested buyers has increased as COVID has worked its way through in the past year or so. It’s an easy answer in that it’s a less dense style of living. People are in their homes, working; they want a little more space and this product generally offers that—sometimes a lot more space. It’s a more private overall lifestyle as well, and it’s in the suburbs. The urban areas are still going to be very strong places to live, but a lot of people liked the suburban lifestyle pre-COVID and even more so now.
It’s gotten to the point where investors are willing to consider buying properties before they’re fully leased up and stabilized sometimes.
Dori Nolan: Taking a step back, we have to distinguish between scattered site single family versus build to rent single family. For the scattered site single family rental market, where an investor owns homes in various cities or states that are noncontiguous or typical single family homes in single family neighborhoods, the single-family rental strategy has been around for a few decades, and really started growing more rapidly as a result of the Great Financial Crisis, when institutional investors took a more opportunistic approach to housing and started acquiring homes out of foreclosure or unfinished or unsold projects from developers. For example, Invitation Homes, which is now the largest owner of single-family homes, was born in 2012. Today, they have over 80,000 homes. American Homes 4 Rent, also founded in 2012, is the second largest owner of single-family rentals with approximately 52,000 homes in 22 states, with a large concentration in Texas, Georgia and North Carolina. These players traditionally have focused on the scattered site business model, which continues today.
But then midway through this market cycle, which seems to be a long cycle, we began to see certain developers or owners of scattered site single family focus on purpose-built single-family rentals projects commonly referred to as build-to-rent. This project is essentially a single-family development with contiguous homes where the developer intends to rent the homes similar to a traditional multifamily project. This trend is really alive and well today. As Mark mentioned, we’ve seen demand pick up considerably over the past year, propelled by COVID and social distancing.
Looking forward in terms of demographic trends and lifestyle preferences, there appears to be a preference to live more horizontal in less densely populated suburban locations, and the demand is much greater than the existing stock. So this should be alive and well for many years to come.
Forrester: It’s really pretty simple: you’re living in a home without the cost of owning a house. Some people either cannot do it, because housing prices are moving quickly, or people want the flexibility of not being tied to a home but they want the lifestyle, not only for themselves but also for their family, which often includes a pretty good-sized pet.
Rental homes have been around as long as they’ve been building single-family homes. What’s different this time is that I would divide the single-family rental space into three basic components. You’ve got the Invitation Homes type; those are full-scale, generally detached homes, sometimes scattered, sometimes together. In addition to that, people started building townhome developments, which are attached homes with attached garages, many of which are smaller and sometimes even in urban settings.
Then the third phase, the newest phase, is people building single-level apartments that are like homes; they’re the same square footage or slightly larger, 10 to 12 units to the acre. They do not have garages, but they’ve got backyards and other amenities, and that’s where you see the NexMetros of the world and other companies in the space.
These three sectors of the market don’t really compete with traditional properties. You either want one lifestyle or the other. To some degree, these three styles of living don’t even compete with each other. It depends on what type of single-family experience you want.
Q: Let’s look at the investor profile. Are you seeing a lot of longtime multifamily investors who see SFR as a complement or perhaps even a replacement?
Forrester: The answer is yes. A lot of traditional multifamily and scattered site owners now own this type of product as well, and there are a lot of new owners as well.
Nolan: We are seeing investors pivot more deeply into build to rent single-family rentals and away from multifamily, mostly because they haven’t been able to find multifamily opportunities where pricing makes sense for their targeted returns. So they’re seeing this as an alternative asset class. But we see both scattered site and build to rent single-family rentals move away from being a niche asset class into a more of a full-fledged asset type that investors will build strategies around, like we saw with student housing or senior housing a decade or so ago.
Q: Looking at the renter profile: what’s the typical SFR consumer? Are investors finding that they offer a predictable income stream? Conversely, are there risks, such as needing specialized knowledge in order to do well in SFR?
Forrester: Some of the large management companies have struggled early on. I think they were quick learners, though. They were not staffing these properties correctly—you don’t need quite as many people onsite when you’re fully leased up, because normally you don’t have quite as many public-area amenities. You don’t have quite the same amount of turnover that you normally have. You don’t have quite the same amount of repairs and maintenance.
Management companies have learned that during the lease-up, you’re going to be very, very busy. We’re working on a deal right now where they did 35 leases one month and 52 leases the next month. So you’ve got to be able to handle that type of traffic. Then once it’s stabilized, you don’t need quite that many people onsite. You still need really good people, because these people that are tending to rent in this product type are paying rents that are higher than some of the newer buildings around them. So you have to give them service, but it’s just a slightly different type of service. You’re not hand-holding quite as much; they want to know that somebody’s there if they need something.
Nolan: These renters run the full gamut from aging Millennials to empty nesters to the younger, what I would call “untethered” renter. Flexibility is more important. They have the financial wherewithal to probably cover a mortgage but maybe not to qualify for a mortgage or come up with a down payment. But these tenants don’t move as frequently. They’re looking for stability, and as you see single-family housing prices continue to raise in many metros around the country, this strategy should remain very attractive for many renters and owners well into the future.
Q: Turning to build-to-rent, what are some of the attractions for investors compared to buying up existing housing stock and turning it into rentals?
Forrester: With the single-family market the way it is now, it’s very hard to buy exiting houses, unless you’re buying them one-off. One of the advantages with build to rent is that you’ve got a defined community for the most part, so you’ve got operational efficiencies. These tend to be huge properties—many of them are 100 to 300 homes, so you can operate them much more efficiently than even, say, a scattered site owner, which may have homes scattered across a 30-mile radius, so it’s not quite the same level of personalized attention. It’s a self-contained asset that you can control and manage, similar to multifamily, if you can find the right place to do it.
Nolan: I would add that build-to-rent single family developments are desirable to investors because homeownership rates continue to decline and so the investors are very focused on providing this type of rental housing to today’s discerning renter. Acquiring or developing the build-to-rent product is just more efficient and easier to manage, versus acquiring the existing product and trying to position it for rental.
With institutional investors, it’s still a very small segment of the market—about 2% of institutional investors are invested in all types of the single-family rental product to date, and you’ll see them build and acquire more rental product as opposed to trying to amass large scale with housing that requires repositioning.
Forrester: You’re seeing announcements coming out more frequently that larger players are getting into this space from a development standpoint, building scale as best they can, and I think we’re just beginning to see how that’s going to play out.
Q: Also, when Invitation Homes and American Homes 4 Rent were acquiring homes after the GFC and repositioning them for rental, they were acquiring many of them out of foreclosure, meaning a very low cost basis. With housing prices the way they are now, that’s not going to be the case.
Nolan: I agree. I think that’s going to be a smaller segment of the market than the build-to-rent. It’s hard to amass scale, and they were able to do it at a time when the market wasn’t nearly as strong. But as things continue to strengthen and economic conditions continue to improve, that’s just going to be harder and harder.
Q: Are there different price points in build-to-rent? Workforce housing, for example?
Forrester: I haven’t seen any workforce product in build-to-rent. Most of the newer developments are geared toward the tenant who is, if anything paying, more in rent than a traditional newbuilding next door. It’s an untapped market, and it’s the cost to build. Land’s getting more expensive. I’m sure there’s a need for this at the lower level, but I haven’t seen it so far.
Nolan: I would agree. These are more affluent renters who are choosing to rent versus own, but there are growing concerns nationally that these middle-income families are unable to find housing at prices they can afford. It’s a concern that needs to be addressed, but right now that’s not the current renter profile.
Q: In working with SFR investors, is the Berkadia team finding that they’re pretty familiar with the category or do you need to provide a fair amount of guidance?
Forrester: I would say it’s a lot easier story to tell now than it was two or three years ago. We were marketing a property about two and a half years go, and an institutional client who I know took a look at it. I met him at the property; he drives up, and sees a swimming pool and a rental office and there’s no other common area. He gets out of the car and says, “Mark, why am I here? You’re wasting my time; I thought you knew what I wanted to buy.” I said, “Do me a favor. You’re here; let’s go look.” As soon as he got inside the home, he got it. On the way out, he said, “I totally understand how it is now, but I can’t sell it to my investment committee.”
Well, he could sell it to his investment committee now, because everybody is getting up to speed on this product very quickly now. I cannot think of a large player that I talk to that isn’t seriously thinking about the space if they’re not in it already. The private capital world is very strong in this space. They’ve been strong since day one, and out-competed many institutional investors early on. We still tell the story, so to speak, but they’re coming to us to see if we have something on the market. We’re not reaching to try to generate interest at this level.
Nolan: We’ve been an early mover in the single-family rental space, starting with more scattered site single family financing. Now, as the category has expanded, Berkadia is very active selling and financing build to rent single family properties and will continue to service our clients looking to acquire, sell and finance in the years to come.
Q: Looking at financing, is Berkadia able to adapt existing products that you would use for multifamily or have you introduced financing products that are tailored toward single-family rental?
Forrester: The things that we’re selling now are extremely financeable. If they’re self-contained communities, the agencies are very interested in doing it. Some buyers prefer to go to life companies or banks. If it’s scattered site single family, the agencies cannot finance those, but the debt funds are out there and there are many other types of investors.
On April 14, Berkadia will sponsor a webinar on the single-family rental sector. Nolan and Forrester will be joined by John Burns, CEO of John Burns Real Estate Consulting, and Keith Misner – SVP, co-head of investment sales at Berkadia. Click here to register.
Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 13-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 15-20 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces.
Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and GlobeSt.com at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications.
Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).