Institutional Capital is Remaking the SFRH Asset Class

After collecting single-family homes all around the country during the Global Financial Crisis, large institutions figured out how to manage these scattered-site properties.

That process of collecting and managing those assets is Michael Carey, Senior Director at Altus Group, calls SFR 1.0. In that period, he says a lot of investors were buying homes one at a time  “on the courthouse steps.”

“The ability to manage the space, which you couldn’t do at the initial phases post-GFC, has led to an institutional asset class,” Carey says. “The evolution of this asset class has happened a lot faster than anyone predicted, and it’s just accelerated with COVID.”

Now, that sector has evolved, we moved into SFR 2.0. In addition to figuring out the management riddle, the sector’s metrics are a lot more transparent now, contributing to institutional acceptance.

Right now, Carey says the SFR space offers a premium over multifamily yields, which is drawing a lot of investors. That delta may not be there forever, though.

“We’re seeing that gap close because there’s so much money coming into this [SFR] space right now,” Carey says. “There are billions of dollars coming in, just from who we track and our clients. We were looking at $5 to $6 billion coming into the market from March to September, and there’s more than that. That’s just our clients and what we know. So it’s a lot bigger than that.”

Carey expects to see “an explosion” in the number of homes owned by institutional investors.

In 2018 and 2019, Carey says institutional investors purchased about 46,000 homes. In 2020, even with the COVID pause in the Spring, he tracked about 55,000 to 65,000 homes purchased by institutions.

“We think easily there will be 70,000 to 100,000 homes being purchased and constructed in 2021 and 2022,” Carey says.  “There are about 50,000 build-for-rent homes that are under construction or planned for development. So that’s a big number.”

As institutions have moved into the space, Carey says there is a greater focus on NOI margins. Ten years ago, they were about 55%. Now, they are 62% to 65% in some of the newer properties. In build-for-rent homes, they are at 70%. 

“They’re [the builders] are really focusing on technology,” Carey says. “It’s not just the management of the home, but the repairs, the work orders that come through and the leasing. For example, you see self-showings or contactless move-ins. “

These efficiencies and scale are partially why purpose-built single-family rental communities are taking off in SFR 2.0. Carey says the big players will look for portfolios of up to 2,000 homes.

“Whether it’s build-for-rent or a scatterplot single-family homeownership, you need to have scale in a market,” Carey says. “You need scale in order to operate it efficiently. You can’t go in and own a hundred homes. It does not work.”