In this Monthly Market Trends series, we offer you our interpretation of current trends through the eyes of our VP of Market Risk, Patrick Donoghue, and provide you with his balanced commentary so you can make the best investment decisions today for the highest returns tomorrow.
After the Great Recession, Wall Street sought higher returns due to a low-yield environment and this led to some degree to investments in Single Family Rental (SFR) units. As a result, institutional investors' ownership of SFR properties has increased to approximately 3% of the SFR rental stock, indicating the recognition of SFR as a distinct asset class.
The extent of ownership percentage of "institutional investors" compared to the overall SFR market varies based on the number of homes owned by different entities. For instance, considering an "institutional investor" as an entity owning 10 or more homes results in a higher ownership percentage, while defining an "institution" as an entity owning more than 1,000 homes yields a more accurate estimate of around 3%.
According to the National Rental Home Council and the Harvard Joint Center for Housing, recent trends show a significant increase in rental households, attributed to factors such as millennials entering common renting ages, aging baby boomers opting for renting, delayed transitions to homeownership, increasing popularity of renting among older households, and the growing diversity of U.S. households.
This growth in renters presents opportunities for investors in the fix-and-flip and new build (Groundfloor) market(s). Traditionally, Groundfloor projects involved buying, renovating, and selling properties to owner-occupants. However, a growing number of investors now have the option to keep and rent out properties, utilizing longer-term financing options like Debt Service Coverage Ratio loans (DSCR Loans).
In Georgia, a key market for Groundfloor lending, this trend is particularly notable, with the state boasting the highest percentage of single-family rental homes compared to the overall housing market, followed by Florida. (Source: National Rental Home Council)
Simply, in the table below if the City has a score greater than 1.0, then more institutional buying than selling is taking place. Near-term investor activity in Groundfloor’s key markets such as Atlanta, Georgia has been positive, with more buying than selling observed. Jacksonville, Florida is currently at a point where it is essentially breaking even but showing positive trends. (Source: Resiclub & Parcel Labs)
This trend prompts questions about the future of institutional investment in SFR properties and its implications for short-term, high-yield loans used for purchasing, renovating, and exiting SFR properties.
Experts anticipate continued institutional investment in the SFR space, driven by factors such as interest rates and investor demand for stable yielding assets. Institutional SFR investors currently own a small fraction of single-family rental homes but this is expected to expand as market conditions evolve.
In terms of scale and to understand what growth may mean in this trend, it can be helpful to look at forecasts. Metlife Investment Management forecasts that by 2030 institutions will increase SFR holdings to 7.6 million homes, which would equate to roughly 40% of all SFR rental stock.
That’s a big number. So, from 3% to 40%.
Relative to dollars allocated commitments may be on the scale of 60 billion dollars, and that was as of August 2022. (Source: dsnews.com)
The potential growth in institutional SFR holdings could reshape the market significantly, offering benefits for both Groundfloor platform borrowers and investors. Borrowers already are benefiting from increased exit options, including selling to institutional investors or refinancing with longer-term loans.
Understanding the dynamics of this evolving trend is crucial for capitalizing on opportunities in the SFR market. In terms of liquidity, borrowers will benefit as more options exist for loan exits like the opportunities to deliver projects to cash-flush institutional investors (likely in multiples, not just one property) ready to execute. And in many circumstances, these exits can be predetermined with a waiting buyer ahead of the renovation commencing, which increases exit certainty. Groundfloor can also evolve loan product offerings that cater to the evolving nature of such a large liquidity pool needing rental property inventory.
Conversely, for the Groundfloor investor, as the market shapes to meet the available liquidity from institutional buyers, we can participate, as we do now, in the renovation aspect of this cycle. Meaning, invest in the high-yield loan offering that already has a waiting cash buyer for an exit. Taken into real individual portfolio terms, greater exit liquidity equals a higher concentration of on time repayments and therefore allows a Groundfloor retail investor the opportunity to move their capital more often through this cycle, and by doing so greater realized returns accrue.
Not understanding the dynamic that Groundfloor borrowers play in this coming trend will likely be a missed opportunity in the years to come. Defined trends can not always be so readily identified. So let’s get ready to diversify our capital into this, probable, coming boom.
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