Interest and investment in the single-family rental (SFR) housing sector have been huge in 2020.
A wide variety of investors from large-scale investment managers to small-scale local investors have been exploring investment avenues and opportunities.
Types of Investment in SFR Sector
Source: CBRE Research, Q4 2020. *Not focus, but some capital may be directed towards development. **Often referred to as "fix & flip" and "fix & hold" strategies.
STR's strong market performance during COVID-19 has attracted elevated interest and capital. The sector has held up very well through the 2020 recession. The fundamental SFR demand drivers match many of the demographic, economic and geographic trends emerging from COVID-19 lifestyle changes.
Despite widespread interest, the SFR sector is often ill-defined and confusing. Scale is a key variable in the wide spectrum of investment avenues. Where scale is larger, the sector takes on characteristics of the commercial real estate industry (investors, intermediaries including investment banks and CRE brokers, property management, etc.). Where the scale is smaller, the sector feels more like the for-sale housing market where individuals are investing, local banks are financing and local real estate agents serve as brokers.
Homebuilders are playing a much bigger role these days. In the past they often had homes which they had built to sell to individuals but were unsuccessful. The builder could "off load" these to aggregators or operators. Now, many homebuilders are merchant-building homes to be sold to operators.
The build-to-rent (BTR) developers are somewhat unique in that they are building communities to be operated like multifamily communities. Some BTR developers are merchant builders while others build to hold at least for a few years.
Institutional Investment Nears $5 Billion
In 2020, institutional investment in the SFR sector came to an extraordinary total of about $4.7 billion if one includes the total market value of Front Yard Residential, which Pretium and Ares Management are buying.
Equity investment in operating SFR companies as well as joint ventures with the large SFR operators provides institutional capital with an avenue for both scale and operating expertise.
Much of the capital is designated to continue the companies' programs in acquiring, renovating and leasing existing single-family homes (in non-contiguous or "scattered" locations).
Yet, more than in past years, some of the 2020 capital infusion is designated to acquire newly-built single-family homes or to develop them in-house. Note that a growing segment of the SFR industry is developing new single-family homes, but not necessarily to be operated as a BTR community (which is like a multifamily community but with freestanding units).
Pretium and Ares Management's acquisition of Front Yard, which is expected to close in Q1 2021, is the most noteworthy of the deals.
Assuming Pretium merges Front Yard with Progress Residential (Pretium is Progress's parent), Pretium will become the second largest SFR owner in the U.S., passing American Homes 4 Rent, currently in second place with about 53,000 homes. (Invitation Homes is the largest with 79,400 homes.)
In February, Amherst Holdings announced that it would buy Front Yard, a transaction valued at approximately $2.3 billion. The merger was called off in May.
Major Institutional Investments in Single-Family Rental Sector, 2020
Source: CBRE Research, Q4 2020. Data compiled from public filings, news articles, company websites and other sources.