The housing market crash produced a flurry of buying activity as investors snapped up single-family homes at bargain basement prices. The recovery in the residential market is prompting investors to retool strategies as this emerging investment niche continues to mature.
Big institutional capital flowing into single-family rental homes in recent years has changed the landscape in a sector that even today remains largely a mom-and-pop business. The Blackstone Group, American Residential Properties Inc. and American Homes 4 Rent are just a few of the investors that have amassed sizable portfolios. But rising home prices in the past year have caused some buyers to pull back on acquisitions, change their geographic focus and modify existing business models.
For example, as home prices escalated in markets such as California and Phoenix, investors shifted their focus to southeast Florida, the Carolinas and the Midwest. “Much as the hype of how big this market was going to get was overblown, I think the predictions of its eminent demise are also not all that accurate,” says Rick Sharga, executive vice president at Auction.com, an online real estate marketplace.
Overall, the inventory of single-family home rentals is still expanding. August marked the 30th consecutive month of year-over-year price gains. The median existing-home price for all housing types in August reached $219,800, up 4.8 percent compared to a year ago, according to the National Association of Realtors. At the same time, the year-over-year volume of home sales dropped 5.3 percent to a seasonally adjusted rate of 5.05 million. NAR attributes the decline to a pullback in buying from all-cash investors.
Higher prices are a problem for investors who rely heavily on price appreciation to get their desired returns.
“What we have seen is that most investors still in the space have altered their business models so that they are more reliant on rental returns, and less reliant on home price appreciation,” says Sharga. Some of the bigger institutions that came in and started buying at scale have pulled back.
New players on the horizon
“What we’re seeing now is that there is growth in super-regional investors—a category in-between the mom-and-pop and institutional guys,” Sharga notes. They might buy a few hundred or even a few thousand properties and tend to concentrate on a particular geographic area, he adds.
Broadtree Homes is one investor that sees opportunity to expand its portfolio as the single-family home market enters a new phase of consolidation. Founded in 2012 as an offering managed by Rochester, N.Y.-based Broadstone Real Estate LLC, Broadtree Homes currently has a portfolio of about 275 rental homes in four markets, including Rochester, Atlanta, Minneapolis and southeastern Florida.
“We think this is part of a very long-term trend for single-family homes to become more acceptable and the consolidation of what is now a mom-and-pops business to a more professional business,” says Broadstone Real Estate CEO, Amy Tait.
Broadtree executives also recognize that prices in the space in the past two years have risen very quickly, without a corresponding rise in rents. As a result, the company is opting for a slower, patient approach to new acquisitions. The company’s strategy is to build a long-term business that is not based on buying distressed homes or doing risky rehab work. Broadtree prefers to act as a consolidator of portfolios that are already established and stabilized.
For example, Broadtree Homes acquired 127 single-family rental homes from The Dominion Group for approximately $10 million. That transaction closed in June and Broadtree also plans to acquire up to an additional 50 homes under the current contract, bringing the total acquisition price to $14 million.
The company is looking for current yields with inflationary protection.
“We’re looking at it as a long-term, core investment, whereas there are not a lot of investors yet viewing it as a core investment,” says Tait. Broadtree typically looks to buy properties at cap rates between 6 and 7 percent, after reserves for capital expenditures. The company has the resources to be patient. It’s dominant business is Broadstone Net Lease Inc., a private triple net lease REIT will assets under management valued at nearly $1 billion.
Broadtree sees plenty of acquisition opportunities ahead and is currently talking with a number of portfolio owners around the country who are interested in selling. Many of the portfolios were bought with expensive capital, such as private equity or high-interest rate loans. That capital structure made sense for buyers who were buying with the intent to take advantage of short-term home price appreciation, notes Tait.
“Once those properties become stabilized and are dull and boring and predictable, they really need to turn over to a different capital source—one that has more realistic long-term expectations,” she says.