In addition, year over year as of May, rent growth stands at 1.7%, the lowest mark since March 2021, according to a new report from Apartment List, a national apartment-rental platform. “Year-over-year growth is now below the average rate from 2018 to 2019 (2.8%), and it is likely to decline even further in the months ahead,” the Apartment List report states.
On top of that, the homebuying market has been flat or declining around most of the country since the middle of last year, according to ATTOM CEO Rob Barber, who notes that the median home price is off 7% since the second quarter of last year, “and is down in most major markets around the U.S.”
“If buying a home keeps getting cheaper, that could motivate households previously priced out of the market to jump back in, thereby reducing demand for rentals,” Barber added. “That, in turn, could flatten out rent increases and put greater financial pressures on [SFR] landlords.”
The KBRA report notes, however, “conventional wisdom” predicts that in a weak housing market, with home prices declining, overall homebuyer demand also declines, which should increase demand for SFRs, producing a rental-rate boost to boot.
In a strong housing market, the KBRA report continues, with rising home prices, “the theory is that a portion of potential buyers should be priced out of the market and will instead enter the SFR market, which would also increase SFR demand and generate positive SFR rent growth.”
“In the current environment,” however, the KBRA report states, “the wisdom of this perceived hedge is being tested as rental rates are flattening, and in some instances declining, even as home prices are declining.”
L.D. Salmanson is CEO of Cherre, a data-integration and insights platform serving major players in the real estate market, including SFR operators. He said the cost of capital is increasing for SFR operators, which currently own about 5% of all SFR properties nationwide, while “rents are kind of flat, stagnating, or potentially increasing but at a slow rate.”
Salmanson added, however, that it’s not decelerating rents that are causing the “massive slowdown in the [home]-purchase rate” by institutional SFR players in recent months, “although that is affecting it.”
“Rather it’s that there are a lot less people selling because they’re not getting the [high] prices that they’re looking for,” he said. “If you got your mortgage between 2% to 4%, you’re not selling, and that’s been the biggest cooling effect.
“Decelerating [home prices] means they are still going up … and “[home prices] now aren’t justified given the interest rates, but that’s temporary. That’s not going to last.”
Challenging environment
The slowdown in property acquisitions by institutional SFR companies also has affected a primary liquidity channel for the institutional SFR sector. Last year, there were a total of 15 securitization deals involving large SFR players valued in total at $10.3 billion, according to data tracked by KBRA.
This year, so far, there has been one offering, a $343 million securitization deal by Progress Residential (Progress 2023-SFR1) that closed in late February, KBRA data show. Progress Residential’s planned second offering this year, Progress 2023-SFR2, was postponed recently due to market conditions.
“[Institutional SFR players’] debt and operating costs are going up,” said Ben Hunsaker, a portfolio manager focused on securitized credit for Beach Point Capital Management, an alternative-credit investment firm. “Securitizations are just not as viable as a financing source [currently].
“There’s probably plenty of private lenders who will do [more expensive] secured first-lien lines against those asset classes, and that might be the solution for the near term, until you have more clarity on long-term rates.”
Hunsaker added that the headwinds facing the institutional SFR market also include rising home insurance and taxes due to the recent hurricanes that have battered Florida, a key market for the SFR sector.
David Petrosinelli, a New York-based senior trader with InspereX, a tech-driven underwriter and distributor of securities that operates multiple trading desks, said while the institutional SFR sector is facing headwinds now, they also have the “benefit of bigger war chests and have the ability to ride out any blip, if not an outright freeze in the market.”
“There are different pockets of capital that can come in,” he added. “It’s just a matter of do those deals make economic sense.
“Will these [SFR operators] that have deeper pockets, can they afford not to use securitization for three months or so until the market thaws?”
The only way the SFR business works in the current high-cost environment is “like old-school real estate,” where you are buying “at the right place, where the demographic trends are favorable,” said Nick Smith, the founder and CEO of Rice Park Capital Management, a private investment firm serving institutional investors, family offices and high net worth individuals.
“Unless you’re one of the winners who gets that equation right, then you’re buying real estate in a market where real estate values are falling and financing costs are going up,” Smith added. “So, it just doesn’t make any sense to me. It’s a real business, but I just think right now it’s very challenging.”
If the headwinds get severe enough and continue beyond a short-term bump in the road, eventually that could lead to a reshaping of the institutional SFR business, Smith added.
“Listen, anytime you have a challenging environment, there’s going to be impacts, and consolidation is one of the potential things that happens, that operators consolidate, and we see people getting out of the business.”
Marvin Owens, chief engagement officer at Impact Shares, a nonprofit investment firm that manages several socially responsible exchange-traded funds, said at the same time the institutional SFR players are pulling back from the market, there also is an expansion of new-home construction underway “with large builders ramping up their production again.”
Owens stressed, however, that because of inflation and high interest rates, those new homes will not be an option for families who cannot afford to purchase market-rate housing. That is not a good outcome for the affordable-housing market when coupled with a lack of affordable rental properties — even if SFR players high-volume home purchases in the recent past served to drive up housing costs in some markets.
“This [the institutional SFR sector] is such an important part of the housing environment, and any signal that they’re slowing down, any signal that they’re having a difficult time, [impacts] opportunities for people to be able to find a find a place to live, and so it’s not a good sign,” Owens said. “Families who aren’t in the market-rate housing market, they’re going to be hurt, and they’re going to continue to be hurt in this current environment.
“So, I see this as being a real negative in terms of what’s going to happen around housing affordability and access. … It means everybody’s going to be hurting, quite frankly.”
SFR silver linings
There is a silver lining in dark clouds over the SFR market currently, according to ATTOM’s Barber. Despite the challenges in the SFR market, ATTOM projects that the average gross yield on a three-bedroom SFR property will “grow from 6.7% in 2022 to 7.5% this year.”
“The latest nationwide projected gross return on single-family rentals sits below where it was several years ago, when it was closer to 8% and 9% in 2019 and 2018, but the expected growth in 2023 follows four straight years of declines,” Barber said. “That suggests a brightening picture for single-family landlords, which should help them with rising interest and labor expenses.”
Kurt Carlton, co-founder and president of New Western, a private real estate investment marketplace serving some 165,000 investors, stressed that the institutional SFR market is really quite young, emerging in the wake of the global financial crisis some 15 years ago.
“This is a small pool [of SFR operators] that was growing fast, and then it froze,” he said. “And it will thaw out … when rates start to fall a little bit more, whenever that’s going to happen,” Carlton said. “And when rents start to outpace home-price appreciation, when the economics get back in balance, they’re back in the game.”