Investors have been flocking to traditional single-family home buyers in recent months. And with private equity funds, REITs and other buyers increasingly rising rents in the sector, demand is not expected to subside anytime soon, even as home prices continue to rise.
According to preliminary data from CoreLogic, investors bought nearly a quarter of single-family homes sold in the fourth quarter of 2021. This equates to September 2021, when investors bought more than a quarter (26.2 percent) of the single-family homes sold. (CoreLogic defines an SFR investor as an individual or company that, according to CoreLogic’s analysis of public data, has owned three or more assets together in the past 10 years, or is a corporate or non-corporate entity on the deed. – Personal identifier.)
“Investor buying really kicked off in 2021,” says economist Molly Bossel, principal, CoreLogic.
The share of single-family homes bought by investors has been rising ever since the first large portfolio of rental homes was assembled in the wake of the Great Financial Crisis. Prior to this, rental homes were generally owned by individual investors. The cost of assembling and managing a portfolio of rental homes made this an unattractive option. But regulatory changes and new technologies have removed those barriers and opened floodgates for the big players.
The share of homes bought by investors has gradually increased since 2008, reaching a pre-pandemic high of 16.8 percent in 2018. This share fell to 15.5 per cent sometime in 2019.
For a moment, many investors held off on acquisitions of single-family homes as prices rose and rents stagnated. According to the National Rental Home Council (NRHC), the amount of owner-occupied housing in the US has increased by about 10 percent over the past five years, while the amount of rental housing has decreased by about 1 percent.
“As the country’s population grows, housing remains in short supply, especially in the fast-growing Sun Belt suburban markets,” says Jonathan Elnzweig, chief investment officer at Tricon Residential.
But in early 2021, rents on single-family homes began to rise sharply, attracting investors back and continuing to rise.
According to the CoreLogic Single-Family Rent Index, rents for single-family homes in December 2021 increased by 12 percent compared to a year earlier. (CoreLogic’s index measures repeated rental changes in the same rental home on multiple listing services, including condominiums.)
This is much better than the slowest rate of annual rent growth earlier in the pandemic – although the annual rent increase for these properties has never stopped.
The annual rate of growth in December 2021 was also nearly three times the rate of growth in the earlier recovery compared to the year ending December 2020. “By December 2020, rent growth has already recovered at a pre-pandemic pace,” it says. Bossel. “We are well above the pre-pandemic trend.”
And the rate at which the fares are increasing is getting faster. The growth in December is the biggest year-on-year increase in the index’s 16-year history. This is the ninth consecutive month that the CoreLogic Index has shown record-breaking growth, says Boesel.
According to Chandan Economics, cap rates for single-family rental homes averaged 5.3 per cent in the fourth quarter of 2021, which is 50 basis points lower than a year ago. Chandan based its cap rates on model estimates and a sample pool of recent loans for rental homes.
According to Arbor’s research, “SFR cap rates have declined for four consecutive quarters after a modest increase in 2020.”
Average cap rates on rental homes declined, even though the benchmark yield on longer-term interest rates such as 10-year Treasury bonds rose over the same period. According to Arbor, cap rates for rental homes have been falling more or less steadily since 2015, when they averaged more than 7 percent.
Rising rental income makes investors eager to buy or build new rental homes, despite rising prices and construction costs. Single-family rental companies continue to develop new homes to serve as renters—especially as the prices of existing homes continue to rise.
In January, Harrison Street and Core Space entered into a $1.5 billion joint venture to build communities of new single-family rental homes in cities such as Austin, Denver, Nashville and a few others.