Insights from IMN: Single Family Rental Forum East

[Tyson Scheutze]

The IMN Single Family Rental East and West conferences are always great opportunities to meet with the most active residential rental experts in the country. And this week's conference in Miami delivered lots of insight as usual. The mood was decidedly more pragmatic than the unbridled enthusiasm of some past events. But accompanying a more measured tone was also the noticeable maturation of thought around the still developing SFR and BFR asset classes.

The consensus, not surprisingly, was that we are in uncertain times but there are certain societal and market fundamentals that make residential rental property, aka SFR and BFR, extremely attractive asset classes, short-term, mid-term and long-term.

This thesis statement was driven by the collective understanding that there are significant rental inventory supply issues in most markets in the country. Even those markets with oversupply are believed to be lacking significant supply for the mid-term and long-term needs. As one participant said, it is not 2009 and inventory will not be coming from foreclosures.

The main takeaway is that the best (and only) way forward is going to be in the construction of new, intentional build-for-rent (BFR) communities. The biggest constraint on these communities is financing rate uncertainty. As rates go, we all go. Read below for notes from the conference and look for notes next week specific to BFR.

NOTES

- Home buying is currently double the cost of renting in most markets. Home price appreciation outpaced even aggressive projections.
- One operator said their data showed slow interest in applications Q1, uptick April/May that also is being accompanied by FICO rate increase.
- Insurance costs are the biggest issue for investors, rates could be higher for a lot longer. The best exit for many SFR aggregators is adding to MLS, for potential purchase by owner occupants.
- M&A opportunity is currently turbo-charged in our space.
- Many sellers of portfolios have been more moms and pops and smaller mom and pop owners are still bringing their smaller portfolios to market.
- Current inventory we’re seeing is not coming from foreclosures. It is not 2009.
- It is as much about stability of rate as it is about reduction of rate.
- Investment going into tier 2 or 3 markets with less insurance risks.
- Service providers are offering more and more operating services.
- Lenders are not balance sheet lenders. They are looking for an exit for their loans.
- Investors would be wise to look into stabilized bridge products with low prepayment penalties.
- Prepayment options have become more flexible.
- There are a lot more bridge loans for rental products, different than original conceptions of bridge products.
- Lenders want to work only with sponsors/operators they are already comfortable with
- Capital is meeting the needs of investors, more flexible.
- The biggest factors for lenders are LTV, FICO, DSCR.
- In a tight DSCR environment, insurance is becoming increasingly important. Needs to be collected early.
- 3% rent growth and 3% HPA is being modeled in most markets.
- Most current rates are in the 7-7.75% range.
- Competitive pressure to deploy capital compressing dropping of rates.
- Buyers are underwriting portfolios to as-is rents.
- Machine learning models are helping to reduce risks.
- Reverse migration to Rust Belt is occurring based on affordability issues elsewhere.
- Scatter site is a defensive asset offering a lot of optionality.
- Market conditions are challenging for scatter site hold unless you are underwriting a 10-year hold.
- Setting up operations for SFR from scratch is very difficult.
- One investor is buying at cap rates in 5s or 6s. Their core product funds return low teens IRR. Their opportunistic fund returns IRRs in the high teens / low twenties. An Atlanta broker reported the average size of 20-30 units at 6 caps.
- Every lender has a certain amount of distress currently. You may not know it.
- Short term rental first bucket of distress based on municipalities prohibiting.
- One broker is targeting retirement age portfolio owners.
- ADU market should be strong for a long time to come.
- Use bandit signs for disposition.
- One investor said for their property sourcing, they are touching people 80-90 times before they buy.
- All lead gen is 90 days out of activity before hits happen.
- There are cost segmenting services that let you do cost segmentation for $450.
- You can’t monitor what you can’t measure.
- Asset management is building client feedback into customization of investment strategy.