Current State of the Single Family Market

[Joe Latson]

Despite the seemingly abundant headlines about institutions diving head first into the single family housing market, they only control only 2% – 3% of single family rentals. The majority of rentals are owned by small companies and individuals. To contrast, +45% of apartments are owned by institutional capital. That is an indicator for how much room there is for the single family industry to further institutionalize.

There has been institutional presence in the single family housing market since the 2008 housing crash, after which private equity giant Blackstone helped fund Invitation Homes. Invitation Homes (INVH) is now the largest owner of single family rental properties in the country with +80K homes. (Note, Blackstone divested their INVH position in 2019; it is currently an independent publicly-traded REIT.)

However, until recently, examples of institutional investors targeting single family housing have not been all that common. This is primarily because it is notoriously difficult to scale, relative to both capital deployment and ongoing operations.

For example, it is harder to invest $200M into individual single family homes than it is to build a single $200M condo building. From an operating perspective, the condo building only has one roof to maintain while a $200M portfolio of houses could have 700!

That said, the current consumer demand story is too powerful for institutions to ignore. And there is a burgeoning ecosystem of start-ups and other technology companies creating efficiencies that weren’t possible before.

There are a number of long-term demographic trends in place that support a single family housing investment strategy.

• There is a massive undersupply in housing caused by decades of under-building; Freddie Mac estimates the US has a shortage of over 4M housing units.
• Millennials are growing their families which is causing them to seek out more living space, yards, and better school districts – all difficult boxes to check in a multifamily setting.
• Younger generations increasingly value access over ownership. Many of them want the flexibility of renting; they are more mobile than their parents either by choice or necessity, and experience more frequent job changes.
• For those that do want to own, for many reasons it remains difficult to qualify for a traditional mortgage – especially for gig economy workers or those that have heavy student debt burdens.

These trends all became more pronounced during the Covid-19 pandemic. Additionally, the newfound ability for many individuals to work from home further increased demand for single family housing as people seek to optimize their living environments.

Combine all that with the fact that during 2020, national single family rents grew by 3.8%, while multifamily saw a 0.8% decline – and the result is that institutional capital has collectively decided that single family is an asset class that deserves a slice of the Asset Allocation pie chart.