The retail store, formerly known as Lumber Liquidators, found a last-second buyer. Just last week, the company, now called LL Flooring, informed the public that it planned to close all its stores and go out of business, shuttering 200 stores nationwide and six in the Phoenix metro area. But an investor entered at the last minute and secured a last-minute deal.

F9 Investments will buy 219 stores along with its Virginia distribution center, online platform and intellectual property. F9 is a Miami private equity firm led by Thomas Sullivan, who founded Lumber Liquidators in 1994 and is an existing shareholder. Sullivan says the stores will re-open under the Lumber Liquidators name.

The company, which went public in 2007, blamed its troubles on higher interest rates and a drop in home sales, which led to fewer home improvement projects. It changed its name in 2022 to rebrand after a “60 Minutes” report on heightened formaldehyde levels in its products.

Securing a mortgage to buy a home has become more expensive than at any time since 2000, making people less likely to move and restricting the migration flows that have become more common during the pandemic.

The number of existing homes sold in the U.S. has fallen every month since February due in large part to spiking mortgage rates. The standard 30-year fixed mortgage rate started this year around 6% — already double the rate during the early part of the pandemic — and it has shot up over the last several months to reach 8% last week, a 23-year high. 

Those elevated rates are having wide-reaching negative implications for the economy. 

“Without the economic dynamism that comes with mobility — not only economic mobility but residential mobility that people also associate with their economic improvement — without that, it makes the economy sluggish,” National Association of Realtors Chief Economist Lawrence Yun told Bisnow. 

In September, existing home sales were down 15.4% year-over-year and 2% month-over-month, according to the National Association of Realtors. That sluggish volume causes ripples across the economy, economists said, as industries tied to home sales domino in conjunction with the slowdown. 

“There’s a huge echo effect,” Mortgage Bankers Association Executive Director Eddie Seilar said. “You buy a house, you often renovate it … people who produce carpets, people who produce furniture, appliance manufacturers [are impacted]. So it’s got this huge ripple effect across the economy, in many ways.” 

Yun also pointed to these sectors as vulnerable to the impact of rising mortgage rates, and he said the overall housing industry comprises 15% of the U.S. economy. 

“All these parts are diminished,” Yun said. “So the economy will weaken.” 

Rates were at record lows during the first two years of the pandemic when the federal government dropped its benchmark rate to zero and funneled dollars into mortgage-backed securities. People used those low rates, along with their remote work policies and newfound appreciation of the outdoors, as an impetus to move to other parts of the country. 

But less than two years later, a swift uptick in mortgage rates, fueled by the Federal Reserve’s hikes, has owners hesitant to move, as they want to hold on to those cheaper mortgages. 

“They’re not willing to give up 3% mortgage rates when the market rate today is 7%,” Chris Porter, the chief demographer at John Burns Research and Consulting, told Bisnow last month. “We’re seeing slower rates of migration in real time simply because more people have moved in recent years and are adjusted to the cost of living.”

As owners choose to stay in their homes rather than trade in their rates, companies are choosing to remain flexible in their return-to-work policies, to the benefit of those who may have moved during the pandemic and are now priced out of moving back, MBA’s Seilar said.

He pointed to news that Boston Consulting Group rented a coworking space in October 2022 for employees who had moved to the Raleigh-Durham area earlier in the pandemic, rather than making them return to one of the company’s main offices. 

“These companies are taking offices in shared office space like WeWork for a few days a week, having people come together, but they’re not forcing mass moves,” Seilar said.

A lack of affordable options in many metro areas is also causing those buyers who are choosing to purchase properties to relocate to areas of the country with cheaper real estate. And companies are following suit. 

“When we look at the jobs numbers, which are directly correlated with where the companies are expanding or relocating, we see job growth essentially happening in the Southern states … and in the Rocky Mountain states,” Yun said, referring to job growth numbers in states like Florida, Georgia, the Carolinas, Texas, Colorado, Utah and Idaho. 

“These are the regions where companies appear to be relocating or companies are expanding,” he said. 

Meanwhile, would-be first-time buyers who are now shut out of purchasing a home due to the inflated mortgage rates will need to continue to rent, fueling the multifamily sector.

“Renters are forced to lease longer, renew their leases, and consequently, that is boosting the overall rental demand,” Yun said. “Charlotte, Omaha, Dallas, you see a construction crane, probably they’re building apartments.”

In response to the stalled home sales market and the increased demand for apartments, some developers have launched new expansions in the build-to-rent market, such as American Real Estate Partners and Foulger-Pratt.

“You’ve got move-up buyers, who would traditionally go from apartments into townhomes or single families … who now can’t afford to go buy these townhouses,” AREP President Brian Katz told Bisnow in August. 

These economic implications could become more pronounced the longer rates remain high, and Yun and Seiler said they expect mortgage rates to remain above 6% until at least the end of 2024.

“Until mortgage rates [aren’t] stuck at this level, then expect sluggish conditions — economy, home sales,” Yun said. “But if the mortgage rate begins to go down sometime next year, then we’ll begin to see the increase in dynamism for the country.”

Foulger-Pratt has been building apartments and commercial projects for more than half a century, and now the Maryland-based developer is expanding into a new business line: build-to-rent. 

Courtesy of Foulger-Pratt

An aerial rendering of Foulger-Pratt’s build-to-rent community in Brandywine, Maryland.

The firm has been quietly working on establishing a BTR pipeline in the Carolinas and the D.C. suburbs for around two years, and its executives leading the effort told Bisnow Friday that Fougler-Pratt is officially launching the new platform as its first series of projects have closed and are approaching their lease-up periods.  

The five projects total 700 units of for-rent townhouses and single-family homes, and their combined project cost is $250M, Foulger-Pratt Managing Director Joe Clauser said. The projects are all scheduled to begin leasing within the next nine months. 

The developer is partnering with a pair of institutional investors, which Clauser declined to name. He said the firm aims to add around 1,000 more units to its portfolio over the next two years and continue to grow from there. 

“Our ultimate long-term goal here is to have a multibillion-dollar platform in this space,” Clauser said. 

The firm is expanding into the BTR space in part because of how challenging it has become to develop multifamily buildings, with rising interest rates and construction costs making deals difficult to pencil, Foulger-Pratt Vice President Nick Beeson said. 

“This really is a matter of shifting demographics,” Beeson said. “We are very bullish about the demand for this housing solution based on family-forming millennials as well as downsizing boomers, so there’s a lot of demographic tailwinds in this space, but also from a return-on-cost basis, these deals tend to pencil better than a lot of multifamily development right now.”

The move also represents Foulger-Pratt’s expansion into the Carolina markets. The Potomac, Maryland-based developer spent decades building around the D.C. area and has previously expanded to California, Utah and Texas. Its portfolio totals 23 multifamily properties, 15 office properties and 12 retail properties, according to its website. 

Founded in 1963 by Sid Foulger as Foulger & Co., the company today is led by Chairman Bryant Foulger and CEO Cameron Pratt. 

Along with the expansion, Beeson, a North Carolina native, moved from D.C. to Raleigh to lead the execution of the regional expansion while Clauser leads its capital partnerships and strategic direction from Potomac. 

“This is the splash, and it’s a sizable splash,” Beeson said of the expansion. “We’ve been actively pursuing opportunities in North Carolina for two years now. We were disciplined and judicious in what we elected to move forward on down here.”

The firm’s initial wave of BTR projects consists of four under-construction projects it is acquiring from homebuilders as they are completed, three in Charlotte and one in Raleigh, plus one in the D.C. suburb of Brandywine, Maryland, that it is building from the ground up. 

The Brandywine project will be 170 townhouses next to the Brandywine Crossing shopping center and a medical office building that Foulger-Pratt developed. 

The project is a rare example in the D.C. area of a build-to-rent community being constructed from the ground up, a strategy that has boomed in the Sun Belt and other regions. Nationwide BTR development hit an all-time high in 2021 with 6,740 new homes completed, according to RentCafe.

The D.C. metro area didn’t crack the top 20 largest markets for single-family rental homes in the RentCafe report, but it has begun to see some BTR projects moving forward. Another local developer, American Real Estate Partners, expanded into the BTR sector in August with the acquisition of a 200-unit townhouse community that is under construction in McLean, Virginia. 

Clauser said the D.C. area’s high housing prices make it difficult for rental product to compete with new for-sale homes, limiting the growth of the BTR market. 

“It was one of rare sites we’d found in the DMV area where we were able to get the land where we could get zoning for townhomes and deliver a product at a cost basis that worked for a rental product,” he said. 

Courtesy of Foulger-Pratt

One of Foulger-Pratt’s build-to-rent communities in North Carolina

In North Carolina, a market that has seen more BTR development, Foulger-Pratt has four projects: a 172-unit community in the Raleigh suburb of Wendell, a 144-unit project in the Charlotte suburb of Gastonia, a 128-unit community next to the Oak Hills Parkland Reserve in Northwest Charlotte and an 86-unit project near Gaston Country Club in the Charlotte suburbs. 

Those four projects were all initiated by for-sale homebuilders, and Foulger-Pratt reached deals to acquire them as they are completed and operate them as rental properties. The deals allowed Foulger-Pratt to buy homes at a discount to what they’d go for individually on the open market, and it helped the homebuilders reduce their risk in a for-sale market that has faced uncertainty due to rising interest rates over the last year. 

“In late 2022, we wanted to capitalize on the then-softening of the homebuilder market, the home sales market, and we pursued strategic partnerships with homebuilders who had projects underway in some of our target markets, and we found mutually beneficial solutions for them to pivot into the rental execution transaction with us,” Beeson said. 

As it works to grow its pipeline, Foulger-Pratt is looking to do more deals with homebuilders, and it is searching in a range of markets. Clauser said it continues to explore the D.C. area and North Carolina, and it is branching out to other parts of the Southeast, plus the Texas and Salt Lake City markets where it has built multifamily projects. 

“We want this to be a national platform,” Clauser said. “While we have certain target markets where we’ve been more focused, we view this as something that we develop throughout the Southeast where these tend to pencil best in the ‘smile states,’ and that’s where capital momentum is, as well, in higher-growth markets.”

The single-family rental market has faced some criticism as Wall Street giants have scooped up massive portfolios of homes in existing neighborhoods, but Beeson said there is a meaningful difference between that strategy and the BTR strategy of building new communities from the ground up. 

“This is not an asset manager coming in and buying up your grandmother’s neighborhood,” Beeson said. “This is new housing stock. This is bringing more homes to communities that need more residential supply.”

Zillow’s exit from the house-flipping business created an opening for investors bullish on the single-family rental market, with an inventory of 9,800 houses nationwide up for sale. 

Single-family rentals are still a relatively small part of the U.S. residential market, but investors are now betting on surging demand for such properties in the wake of rising house prices exacerbated by the coronavirus pandemic. 

Investors are also betting on something else: a long-term shift in demand away from apartments and toward single-family houses, especially among the generation rising after millennials. They might not be able to quickly afford to buy a house like their parents or grandparents, but data shows they want to live in one.

Among members of Generation Z between 18 and 23 years old surveyed by the National Apartment Association, 43% of respondents say they want to rent a single-family detached property after entering the workforce, while 44% would prefer to live in a “vibrant suburb,” compared to the 23% who would prefer the city. 

Investors want to make that happen, with a growing number of companies throwing their hats into the single-family rental ring. 

These players could win big under such a shift in demand from the multifamily sector, though the SFR product has headwinds similar to that of the typical residential market: a lack of inventory. 

“There’s a lot of capital looking to invest in this space but few executable projects,” IHP Capital Partners Senior Vice President Jeff Enes said. “Resale inventory remains low in many markets, and for developers, there tends to be a protracted entitlement process, which makes it difficult to bring new product to market.”

Interest in the sector is encouraged by renter demand from new demographics and incentives for build-to-rent product, which has an 8% annual return on average, The Wall Street Journal reports, citing Green Street data. That is the highest of any property sector tracked by the firm. 

“Building upon our experience, IHP is looking to expand that business in multiple markets,” Enes said. 

IHP Capital provides equity for homebuilders in the West, where it is currently involved in 37 residential projects. IHP is also pursuing single-family rental projects. Through an affiliate, IHP is developing five single-family rental communities in Phoenix, one of the hotter single-family rental markets.

Most single-family investors are still small operators, many with just one investment property. Larger investors owned about 300,000 single-family rental houses as of 2019, according to Laurie Goodman, vice president for housing finance policy at the Urban Institute, while small-scale investors own 15 million units. But larger investors are seeking to expand their presence in what they see as a growth market.

JLL Income Property Trust recently jumped into the game by purchasing a 47% interest in a portfolio of over 4,000 homes assembled by Amherst Residential, which manages the properties. The company paid about $560M for its share of the houses, which are in such markets as Atlanta, Dallas, Phoenix, Nashville, Tennessee, Charlotte, North Carolina, and Tampa, Florida. 

The company flagged single-family rentals as a “near-core property sector poised for accelerating institutional capital inflows,” JLL Income Property Trust President and CEO Allan Swaringen said in a statement.

“Given the superior long-term tenant demand growth outlook, our research projects long-term expected rent and NOI growth above all other institutional property type averages,” he said.  

Zillow could serve as a source for expansion for single-family rental investors. A company spokesperson told Bisnow the firm will sell the remaining inventory “the same way we always have, by selling to buyers of all kinds, including individuals, families, individual investors, institutional investors and nonprofits.”

Bisnow Archive/Ian Johnston

Regardless of the ultimate disposition of those particular properties, the demand for those homes is clear. 

During the third quarter of 2021, real estate investors bought 18.2% of all U.S. homes purchased, up from 11.2% the year prior, according to Redfin, and representing the highest percentage on record since Redfin began tracking the market in 2000.

The Q3 percentage represents 90,215 residential units, with investors paying nearly $64B for the properties, up from $59B in the second quarter and $36B a year earlier. 

Some markets are attracting more investor interest than others, according to Redfin. In Atlanta, about one-third of homes sold in the third quarter were snapped up by investors, the highest rate among the 40 metros the company analyzed. Next were Phoenix, Charlotte, Jacksonville, Florida, and Miami. 

Those markets have seen steady year-over-year increases in multifamily rents, and the addition of SFR inventory could potentially level out those gains. 

Spurred by a 5.7% rent increase in Q2 2021 alone, the average effective apartment rent has risen in Metro Atlanta by 11% year-over-year, Marcus & Millichap reports. Phoenix, meanwhile, has seen apartment rents spike 20% since August 2020, according to ApartmentList.com.

The larger backdrop of demand for single-family rental housing is the frenetic overall U.S. housing market. 

In 2020, existing-home sales rose 6% year-over-year while new single-family home sales spiked by 20%, putting total home sales at their highest level since 2006, according to the Joint Center for Housing Studies at Harvard University.

Meanwhile, rents in institutionally owned SFR portfolios grew more than 3% annualized in 2020, according to data from DBRS Morningstar. The pandemic was at work: Reduced mobility pushed more individuals and families to rental homes with more space.

The activities of single-family investors will drive home prices up further, critics say, especially in growing metro areas where investors are snapping up relatively inexpensive single-family homes. 

As investors buy sites to develop single-family rentals, homebuilders would be forced to compete, potentially paying more for entitled land. That cost most likely would be passed along to buyers.

What’s more, investors are already competing directly with traditional homebuyers, which may worsen the prospect of homeownership for those entering the job market or millennials unable to exit the rental market. 

“Large investors buying single-family homes is a significant threat to the average homebuyer since the average homebuyer cannot compete,” said Carmen Hill, a Los Angeles-area residential real estate broker and professor of real estate investments at Cerritos College.

Other investors pursuing land acquisitions in anticipation of continued demand for single-family properties, for sale or otherwise, include alternative investment firm Värde Partners, which has entered into a land banking facility agreement with Taylor Morrison Home Corp., the nation’s fifth-largest homebuilder.

“The significant growth in demand for suburban housing has exposed a persistent shortfall in supply, creating substantial opportunities to invest,” Värde Partners Managing Director Brendan Bosman said. 

Though Taylor Morrison mostly develops properties for sale to individual buyers, it has been exploring single-family rentals since before the pandemic. In 2019, the Scottsdale, Arizona-based homebuilder formed a partnership with Christopher Todd Communities to build single-family rental communities.

Other major players in the single-family rental space, such as Pretium Partners, are also expanding their reach. 

Pretium’s rental property management operation, Progress Residential, owned about 66,000 single-family homes in 29 markets as of the end of Q2 2021, with an occupancy rate of nearly 97%, according to the company.

In January, Pretium formed a $700M joint venture with Canada’s Public Sector Pension Investment Board to develop SFR housing in the U.S. In September, Pretium formed another joint venture with Crescent Communities to develop $1B in new single-family build-to-rent communities. The first community will be in the Charleston, South Carolina, market, and others will follow in the Southeast and Southwest.

The partnership plans to develop more than 3,000 new rental homes altogether, according to Crescent Communities Managing Director, Single-Family Build-to-Rent Tony Chen.

“There is significant opportunity in the SFR market and a clear sense of urgency among institutional investors to deploy capital to this asset class,” Pretium Chairman and CEO Don Mullen said in a statement early this year.