Blackstone’s announcement in late 2019 that it was cashing out of Invitation Homes marked the completion of one of real estate’s boldest bets of the decade. In the wake of the financial crisis, Blackstone strategically invested hundreds of millions of dollars into foreclosed and distressed properties and converted them into single-family rentals, creating Invitation Homes as its corporate vehicle. Now, as Blackstone winds down its investment in single-family rentals, it’s a good time to review where we’ve been, where we are now and where we may be headed.
Blackstone’s first-mover investment with distressed real-estate, just like similar heady investments made by the likes of Starwood Waypoint Homes, American Homes 4 Rent and Tricon, certainly helped to stabilize and beautify some hard-hit local communities and helped clear a few key markets glutted with unsellable homes.
Many claim, with good measure, that these early investments helped to put the U.S. housing market back on firm footing when many others thought that the market was a bad bet.
Not only did these firms help to stop the housing free fall, they helped to create an exciting new market for single family rentals with people, processes and systems where none existed previously, with scale and with untapped potential that vastly outstrips its current size. The SFR institutional ownership market today consists of about 200,000 to 250,000 homes concentrated in key communities across the country.
But those properties represent only a fraction of the nearly 13 to 16 million rental homes nationwide. Most of these rental properties are managed by small property owners who generally lack economies of scale. There have been some brave innovators that have tried to organize this fractured market and at one time it looked as though the housing government-sponsored enterprises would build a take-out capability and inject a flood of liquidity, but GSE-backed securitization by Fannie Mae and Freddie Mac is still a ways off.
While not exactly the Wild West, the SFR market lacks some of the comforts of a mature marketplace, which is understandable as the formation of the asset class is only six years in the rearview mirror. However, there’s inventory, a thirst for liquidity and a desire to put capital to work, which are the ingredients for bullish days ahead.
Andf demographic trends work to support this bright outlook. In fact, according to a recent report by the Mortgage Bankers Association, there will be a full 5.4 million more renter-occupied households in 2024 than there are today. And while Gen Xers represent a trough in housing demand after the Baby Boomers, Millennials entering the market are beginning to take up the slack and now account for the 2.7 million additional renter households headed by someone between the age of 18 and 44.
Merger and acquisition activity – such as Redwood’s recent acquisition of both SFR and fix-and-flip lenders Corevest and 5 Arch – along with new ideas such as fix and flip lenders moving into secondary markets and commitments for a build-to-rent strategy, are natural offshoots of the original SFR theme. And these point to the positive health for this segment of the housing market.
While still in the first quarter of this four-quarter game, another new generation of SFR innovators are testing the market. Using algorithms to micro-target opportunities and mailers to solicit sellers, iBuyers such as Zillow and OpenDoor are offering homeowners market value for their homes in cash with no real estate agent or middleman.
It remains to be seen how many more properties these new entrants will bring into the market, but in the process, they may be creating the conditions for a new class of institutional take-out. For example, if you think there is potential in a market like Atlanta or Jacksonville, you could mount a mailer campaign and buy 50,000 SFR properties from a variety of disparate homeowners.
Instead of holding those properties on your balance sheet, you could take-out a securitization with a single underwriter to give you additional liquidity. If you flip the asset within 90 days you could do a substitution of that asset in the security and basically swap new loans for old ones that sit – in a sense – on the balance sheet of the security underwriter. The economics of these types of revolving securitizations have worked for smaller fix and flip lenders with a few private non-rated securitizations and could be attempted in scale for rated securitizations as the players further mature in the market.
While the SFR market is changing quickly, the original banks and sponsors have been joined by many new and innovative entrants to the market.
There’s plenty of room for new ideas and new entrants so it’s difficult to see if a new champion will rise from this group. But, it’s nearly inevitable that one of these players will one day be the first to assemble a managed portfolio of 500,000 to a million rental properties. And if the GSEs ever get back into the market you could see that milestone happen sooner rather than later. But for now, private lenders are happy to be doing business in the SFR space.
The Blackstone news reminds us that we used to think of the SFR market as new and ephemeral and that it would probably go away once the economy recovered. But now it looks more like we’ve only scratched the surface. It has evolved into something much bigger and more exciting for the benefit of the overall national economy. For those innovators with insights, a vision for the future and an eye on standardization, single-family rental is a very hot market.
It’s hard to predict where all this is going to land. But for now, there are abundant opportunities to succeed.
