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BTR Poised to Become More Important for Institutional Investors

Updated: Jun 7, 2022

By Erik Sherman

January 04, 2022 at 07:22 AM

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SFRs are all well and good, but there’s not enough existing inventory.

When Greystar Real Estate Partners and Canada Pension Plan Investment Board (CPP Investments) formed a joint venture to address the purpose-built single-family rental market, it wasn’t a whim or experiment.

Single-family rentals have been on the upswing and a heating market, drawing increasing attention from institutional investors. But big investors might instead focus on the build-to-rent market, suggests a presentation from real estate consulting firm RCLCO.

Between high prices and lack of enough money for down payments, millennials have a lower homeownership percentage than older generations and it’s not clear what Gen Z members will do. And yet, many want the amenities and greater room of a home, particularly those who moved to affordable areas in the Sun Belt. Combine that with insufficient construction of traditional homes and rentals address a sweet spot in the market.

According to RCLCO’s figures and projections, SFRs currently comprise 22 million rentals in the US or a third of all rental housing. The big source has been for-sale conversions, further reducing the sales stock, which drives up prices and adds even more pressure on people who might otherwise be buyers. The firm projects a demand for an additional 2.5 million additional single-family rental units—whether houses, townhouses, rowhouses, duplexes, or quadruplexes. Condos aren’t included because the definition RCLCO uses is having a ground-to-roof wall separating units, no units located above or below, and separate heating systems and individual meters for public utilities.

The factors that make it difficult to purchase homes now affect institutional buyers as well as consumers. While the investors will typically have significant cash resources, the residences must provide financials that allow for profit.

The fundamentals leave open a space for build-to-rent. “Purpose-built single-family rental is on the rise, increasing from an average of 3.5% of single-family completions in the 2000s, to 5.1% in the 2010s,” says the RCLCO presentation.

“If purpose-built SFR continues trending up [over the next decade], approximately 700,000 new SFR units could be delivered in the same period. If foreclosure rates remain at their five-year average, own-to-rent conversions could add 728,000 SFR units in the next decade, but if COVID causes foreclosure rates to spike, this figure could be much higher (a 1% average foreclosure rate would equate to 1.3 million SFR additions). This still leaves unmet demand for an additional 500,000 to 1.1 million units of new SFR product over the next decade.”

On the plus side, there are potentially high yields, strong rent and revenue growth, low vacancies and turnover rates, and high demand.

The potential cons include knowing the best product types for markets, increasing competition, rising costs of land and construction, and social and political criticism of institutions owning larger shares of housing stock.

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