A white paper that Amherst Capital issued this past November puts the gap in terms of dollars and cents. The total market value of SFR properties in the US is $3.1 trillion—not far behind the $3.2 trillion of US apartments—of which institutions own about $32 billion. This comparatively tiny share compares with other income-producing real estate sectors, such as multifamily, where institutional control may represent 50% or 55% of the total, according to the Amherst white paper.

In an investor presentation accompanying Thursday's announcement, Invitation Homes and Starwood Waypoint cited the economies of scale that would accrue from their merger. The Amherst white paper cites several areas in which such economies come into play, not least of which is acquisitions.

“As anyone who has ever purchased a home knows, buying individual properties takes time and effort,” according to the white paper. “This is true for single-family operators as well. However, the underwriting, bidding, follow-up negotiations and final closing processes are streamlined by institutional operators who typically intend to bid on thousands of properties across the country and hundreds of properties in any given geographical area.”

Renovations, marketing and maintenance/repairs are other areas cited by the Amherst white paper. Another is the cost of capital: institutions enjoy access to “cheaper and better-structured financing vehicles” that allow them to avoid relying on “longer term and usually more expensive mortgages while other classes of investors still rely on mortgages” to some extent.

More recently, Adam Stern, president of SFR brokerage OwnAmerica, said in a June webcast that “the scale and the operational efficiencies of these large portfolio owners gets to a point where their acquisition opportunities become larger and larger and larger. You can see how a trend toward consolidation can be sped along by portfolios getting larger, operational capacity getting better, NOI margins getting larger and expense margins getting shrunk down.

We think this is going to be a continued trend, and we believe that everyone on a continuum of large investors all the way to the very smallest investor has a role to play,” Stern said in June.

DALLAS—Among single-family rental landlords, the post-merger Invitation Homes will overshadow the current top dog, American Homes 4 Rent (AMH), by more than half. It will control about 82,000 rental properties, compared to the 49,000 now owned by AMH.

Beyond potentially representing the SFR sector's debut in the S&P 500—the merger of Invitation Homes and Starwood Waypoint Homes will create a REIT with an enterprise value just behind that of HCP—the deal announced Thursday may signpost a broader trend. That is to say, further inroads by large institutional players into what remains a sector largely in the hands of small-scale, local operators.

Consolidation is one aspect of this. The company that Invitation Homes is acquiring in an $11-billion stock-for-stock transaction is itself the product of a merger: the combination of Colony American Homes and Starwood Waypoint Residential Trust, which closed in January 2016. This brings the “big four” of SFR REITs that existed two years ago down to just two—AMH and the post-merger Invitation Homes.

Beyond that, there's the gap between the size of the SFR market and institutional penetration of it. “There are about 15 million rental homes out there, but most are owned by moms and pops—people who move and have a house that they don't want to sell, so they rent it out,” Peter Ciganik, managing director of GTIS Partners, said in a Privcap podcast this past March. “About 250,000 to 280,000 of these homes are owned by institutions. We own almost 4,000 of them, which is a tiny fraction of the total. Less than 2% are institutionally owned, but it's growing fast. It's actually growing faster than the multifamily REITs back in the early 1990s.”

A white paper that Amherst Capital issued this past November puts the gap in terms of dollars and cents. The total market value of SFR properties in the US is $3.1 trillion—not far behind the $3.2 trillion of US apartments—of which institutions own about $32 billion. This comparatively tiny share compares with other income-producing real estate sectors, such as multifamily, where institutional control may represent 50% or 55% of the total, according to the Amherst white paper.

In an investor presentation accompanying Thursday's announcement, Invitation Homes and Starwood Waypoint cited the economies of scale that would accrue from their merger. The Amherst white paper cites several areas in which such economies come into play, not least of which is acquisitions.

“As anyone who has ever purchased a home knows, buying individual properties takes time and effort,” according to the white paper. “This is true for single-family operators as well. However, the underwriting, bidding, follow-up negotiations and final closing processes are streamlined by institutional operators who typically intend to bid on thousands of properties across the country and hundreds of properties in any given geographical area.”

Renovations, marketing and maintenance/repairs are other areas cited by the Amherst white paper. Another is the cost of capital: institutions enjoy access to “cheaper and better-structured financing vehicles” that allow them to avoid relying on “longer term and usually more expensive mortgages while other classes of investors still rely on mortgages” to some extent.

More recently, Adam Stern, president of SFR brokerage OwnAmerica, said in a June webcast that “the scale and the operational efficiencies of these large portfolio owners gets to a point where their acquisition opportunities become larger and larger and larger. You can see how a trend toward consolidation can be sped along by portfolios getting larger, operational capacity getting better, NOI margins getting larger and expense margins getting shrunk down.

We think this is going to be a continued trend, and we believe that everyone on a continuum of large investors all the way to the very smallest investor has a role to play,” Stern said in June.