The Math Is Changing for Sunbelt SFR Investments

Investors have gone cold when it comes to purchasing homes in the previously hot Sunbelt markets, according to new data from Redfin.

Rising mortgage rates, high home prices, and a lackluster rental market were the culprits.

It found that the seven metros where investor purchases declined fastest are Atlanta (49.7% drop), Charlotte (-49.6%), Jacksonville (-48.2%), Phoenix (-47.4%), Las Vegas (-43.3%), Orlando (-42.6%) and Tampa (-41.3%).

Nationally, investor purchases fell 30% year over year to the lowest third-quarter level in seven years.

Redfin Premier real estate agent Heather Mahmood-Corley based in Phoenix said in prepared remarks that if she gets any investor clients these days, it’s usually the mom-and-pop ones.

“The bigger investors who used to come in and buy five or 10 homes at a time—you just don’t see that anymore,” Mahmood-Corley said. “The money they were getting from hedge funds has dried up, rents are down and demand for housing in general has slowed because so many people are staying put.”

Redfin Senior Economist Sheharyar Bokhari said he doesn’t expect investors to dive back into the market in a big way anytime soon.

“Borrowing costs are unlikely to fall significantly in the near future, and while home prices may soften a bit, they probably won’t cool enough to bring back a critical mass of investors,” Bokhari said.

The 30-year fixed mortgage rate rose above 8% recently, but this week has fallen to about 7.5%.

“The investors who bought up all the Airbnbs are selling—some are institutional investors, and some are mom-and-pop investors who got in over their heads,” Mahmood-Corley said.

“They’re selling because the Airbnb market isn’t as strong as it was during the pandemic, and in some areas, new rules on short-term rentals have made owning them less attractive. There are also just a lot of unknowns right now, so some people want to get rid of their investment properties, so they don’t have to deal with the uncertainty.”

Up until a few years ago, the situation was quite different. Low borrowing costs and high home prices pushed the real estate investing community towards long-term rental properties, Doug Ressler, Manager of Business Intelligence Yardi Matrix, tells GlobeSt.com.

“If for nothing else, borrowing costs were able to help offset high acquisition costs and home prices reduced profit margins on quick flips,” Ressler said. “Low interest rates helped landlords increase monthly cash flow.”

But housing affordability plummeted to historic lows this year, with only 23% of U.S. listings in April considered affordable to households earning $75,000 or less, according to the National Association of Realtors.

What Needs to Happen 

For large levered investors to return to the market one of three scenarios must happen, says Gregor Watson, Co-Founder of 1Sharpe: a significant drop in home prices by over 20%, which seems improbable due to the persistent supply shortage; a substantial decrease in interest rates; or an increase in rents that surpasses inflation.

“Presently, the active buyers are primarily homeowners who perceive the home as a necessity rather than an investment, thus avoiding the additional expenses like vacancies and property management that landlords face,” Watson said.

He added that many investors find it difficult to attract capital for housing investments in an environment where credit markets and vehicles can offer a 10% return, complemented by a significant margin of safety.

Even buyers with cash are finding interest rates to be a challenge, Kyle E. Scheiner, partner, Romer Debbas LLP, tells GlobeSt.com. “They may find the need to take out a renovation loan to make the home enticing for rentals or a flip or even a line of credit to manage operations of a multi-unit rental building,” he said.

“This presents problems because the higher borrowing costs chip away at the potential profit at the end of the project. The higher interest rates, while pricing ordinary purchasers out of the market right now, are also pushing up rental prices which may be unsustainable in many areas with few able to afford the cost of the rentals.

“This would have a chilling effect on the ability to find qualified tenants, thus having the investor pay to carry costs without any revenue coming in to offset.”

Net Sellers 

None of this is new to the largest institutional investors that have been active in the single-family rental housing market and some, such as Invitation Homes, have become net sellers in this market. Joseph Rubin, Senior Advisor at EisnerAmper, tells GlobeSt.com that may be the best option for investors now. 

“In many markets, it is more difficult to achieve rent growth, even after a renovation, and higher operating expenses – particularly insurance – are constraining net operating income,” he says. “Owners are also finding it difficult to efficiently manage disparate units across markets. For those investors who have been in this game for a few years, rather than double down in a tight market it may be the right time to sell and recirculate capital.”

Where the Activity Is 

Some unlevered investors are optimistic about the long-term prospects of the US housing market, driven by strong trends in household formation and rental growth, according to Watson of 1Sharpe. “Many of these investors are concentrating on ‘Build to Rent’ communities, which not only present a compelling investment opportunity but also contribute to alleviating the supply constraints that the nation currently faces.”

Certain geographic areas, such as the south, are still attractive to some investors, although they are preferring to concentrate on new rental properties and, increasingly, on standalone units — Yardi’s Ressler said.

But investors need to approach the region aware that the math is changing. 

Brian Lichtenberger, CEO, Markerr, tells GlobeSt.com that his firm’s data show that Sunbelt rent growth over the past year has declined by 3.3% as of September 2023.

“The lower number of purchases in the Sunbelt could be driven by the rent declines or the ~15% growth in supply over the past year,” he said.

Despite this, he said Markerr’s quantitative rent growth forecast points to the Sunbelt markets delivering a higher growth over the next five years with a 2.4% compound annual growth rate versus the top 100 markets across the US with a 2.3% 5-year CAGR.

Of the seven markets with the largest declines in investor purchases, Markerr’s forecast points to Charlotte, Jacksonville, Orlando, and Tampa outperforming with an average 5-year CAGR of 2.9%.