Institutional SFR Investors Slow Their Roll

Institutional investors have slowed their once rapid pace of single-family rental acquisitions, causing it to register what Yardi Matrix terms “moderate growth” for the first two quarters of this year. Instead, many of these investors are focusing on becoming more efficient in their operations, which Yardi Matrix stated will put “the industry in position to thrive over the long term.”

In the first two quarters of this year, only $412 million of transactions were completed, lagging by far the $2.7 billion done last year and the $2.8 billion in the prior year of 2021. These sales reflect properties with at least 50 or more units.

Among the prime reasons for the slowdown: the absence of inexpensive or affordable financing—no more 3%-4% mortgage rates, the lack of lots of single-family housing inventory available for sale, which is down as homeowners with low-rate mortgages stay put, the lower amount of investment capital pumped into the sector and the higher capital costs, which make it tough for SFR firms to meet their return targets at current home prices and rent levels. And looking ahead, nobody should bet that lower mortgage rates are coming to help spur acquisitions again since the Federal Reserve wants inflation near its 2% target before it lowers rates.

At the same time, the price per unit of institutional SFR communities sold has gone up this year, rising to $310,000 in this year’s first half, which is up 8% from last year’s $286,000. And it’s up a whopping 55.8% up from the average $199,000 in 2020.

Among the 15 biggest owners are No. 1 Redwood Living out of Independence, Ohio, which has 17,107 units in communities with 50-plus units; No. 2 NexMetro Communities in Phoenix, Ariz., with 5,903; No. 3 American Homes 4 Rent in Las Vegas with 5,720; and at No. 15 Corvias Group in East Greenwich, R.I., with 1,700.

Despite the apparent healthfulness of this niche in the past due to its rapid growth, which might have convinced many institutional SFR investors to get on board, the number doing so is described by Yardi Matrix as “thin.”  More than three-quarters of institutional SFR units are managed by 32 “mega” investors that own 1,000 or more properties with the rest owned by small, local investors, trust funds, slippers, servicers, builders and government agencies. There are two SFR public REITs.

Also, worth noting is where the largest number of these investments are located. The Midwest has the most stock with more than 33,000 units, followed by the West with 22,000, Southwest with 20,000 and South with slightly more than 15,000.