Tower Capital helped arrange a $19 million loan to refinance 99 townhomes developed in the first phase of Poplin Glen, a 268-unit BTR development in Charlotte. The loan replaced an original bridge loan Tower Capital arranged in July 2021 to acquire the townhomes at certificate of occupancy with the intention to lease all the units.

The sponsor, who has declined to be identified, will begin selling the individually platted homes in Phase 1 to homeowners individually as units become vacant. Redfin’s Jill Moyer has been brought on to handle the sales. The subsequent phases, including Phase 2 with 70 units and Phase 3 with 99 units, will remain rentals.

Tower Capital’s Kyle McDonough said, “Demand is increasing from buyers seeking to own a property and it made sense to adjust the plan to meet that homeownership market need.”

The initial phase of Poplin Glen, delivered in 2021 and 2022, consists of two-story, three-bedroom, 2.5-bath townhome units with one-car direct-access attached garages and backyards.

Bisnow/Shai Dolev

Chapman Taylor’s Michael Swiszczowski, Moda Family Homes’ Chris Procter, IMMO Capital’s Samantha Kempe, UKAA’s Lesley Roberts and Chapman Taylor’s Catalina Ionita

The UK single-family rental sector is fast convincing real estate investors of its benefits. If it can prove it helps housing affordability and creates much-needed new homes, it just might convince society at large as well. 

“While we’re not necessarily doing God’s work in investing in single-family housing, by investing in that sector we’re creating additionality and net new housing,” Packaged Living Managing Director of Single Family Housing Jonathon Ivory told an audience of 200 at Bisnow’s Single-Family Rental event late last month. “Covid-19 has changed how and where people want to live, and single-family rental provides new homes in green and open places that improves wellness and quality of life.”

Packaged Living is backed by Canadian investment giant Fiera Capital, Ares is backing developer Moda for a £1B single-family rental drive, and Swedish investor EQT is backing Sigma Capital, among many large investors looking to buy into the sector in the UK.

In the UK, single-family rental has emerged in the wake of its rise in the U.S., where it has faced criticism for putting homes into the ownership of large institutional investors, rather than individuals. 

Conductor founder Charlotte Constance quoted a statistic from a survey undertaken by the data firm, highlighting that 86% of those polled wanted to own their own home rather than rent.

“How can you sleep at night?” she asked the panellists.

Ivory said that in building new homes, institutional investors and the developers they backed were helping to meet the housing targets set by government, and that structural factors had led to the consistent shortfall of housing built in the UK.

Bisnow/Shai Dolev

Packaged Living’s Jonathon Ivory, Sigma Capital’s Rob Sumner, Godwin Developments’ James Mulcare, Apache Capital’s Richard Jackson, L&G’s David Reid, Bond Bryan’s Tomasz Romaniewicz and Conductor’s Charlotte Constance

He made an often overlooked point that this structural shortfall had pushed house prices up. Combined with low interest rates and a decline in pension contributions, that meant that for many people, owning a home was a savings and pensions scheme as well as a place to live.

“It is not this sector’s job to fix those structural inadequacies,” he said. 

Other speakers argued when it comes to affordability, purpose-built single-family came out ahead of other forms of open-market rental housing.

“It’s a value proposition that’s attainable to the mass market,” Moda Family Homes Director Chris Procter said. 

“It will be at a significantly lower price point than city-centre apartment schemes,” he said, adding that although it may be slightly more expensive than a single-family home owned by a buy-to-let investor, the quality of the home and the service offered by a large scale, professional landlord would be significantly higher. 

Sigma Capital Investment Director Rob Sumner offered data to back this up. Sigma manages listed company PRS REIT, which owns 4,000 suburban single-family rental homes. He said the average household income of its tenants was £42K a year, and that those households spent about 25%-30% of their net income on rent, compared to 35%-40% in the urban BTR market. That makes its homes far from a premium product, he said. 

UKAA President and Allsop partner Lesley Roberts said it was easier to incorporate social housing into single-family rental schemes than traditional big-block urban multifamily schemes. The income differential between the open-market units and the socially rented units is smaller, and there is also a more practical reason. 

“The land is cheaper, and you can build to the pace of absorption in your market, which makes assimilating the two and creating a community easier,” she said. “Towers are expensive, you can’t occupy them until they are built, and the specification can be a bit higher.”  

IMMO Capital is a platform buying existing homes on behalf of institutional investors. In a podcast interview with Bisnow, Chief Investment Officer Samantha Kempe said the company was not necessarily taking homes out of the hands of individuals because it was often paying less than individuals were bidding.

“Quite often, we have [sellers] come back to us because the other bidders fell through,” she said. “They weren’t able to get their mortgages in place, or they changed their mind last minute, and they ended up finding another property. And the seller will come back to us and say, ‘You know, are you still willing to buy that price? I’m in a chain, I need to move.’ So, the convenience factor and the certainty that we can provide sellers — that often means that we are able to buy properties at a bit of a discount.”

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.