Single-family rental (SFR) companies such as Invitation Homes and American Homes 4 Rent got their start by buying houses out of foreclosure in bulk after the housing collapse 10 years ago. But with housing inventory shortages breaking out across the country over the last few years, it’s gotten harder for SFR companies to add to their rental stock. To get around this, SFR companies are beginning to buy homes directly from the source—home builders.
SFR companies’ need for new housing inventory has led to their increasingly cozy relationship with home builders, one that‘s also contributing to a rise in “built-to-rent” housing, where a home builder sells a house directly to an entity that intends to rent it.
While the scale of built-to-rent activity is still relatively small and mostly casual, there are already signs that more formal partnerships or mergers between SFR companies and home builders are on the horizon. There are also new companies that build entire single-family subdivisions with the express purpose of renting the units themselves.
“I think you can just read the tea leaves and see that there’s definitely relationships emerging in the industry,” said Rick Palacios, Jr., director of research at John Burns Real Estate Consulting.
Built-to-rent single-family homes are nothing new. In the mid-1980s, built-to-rent housing regularly topped 30,000 units during any given 12-month period. In the run up to the housing collapse in 2008, the pace of built-to-rent housing topped more than 40,000 new units before dropping to 12,000 in 2009, along with everything else related to housing during the bust.
Today, built-to-rent housing has climbed back to about 30,000 units over a rolling 12-month period. Most of the stock is built in suburban markets in the southeast and southwest, where single-family housing is already predominant. Those markets also happen to be where SFR companies are most active.
In the past, built-to-rent homes were sold to the type of small “mom and pop” single-family rental investors that still make up the vast majority of the 16-million-unit SFR industry today. But the rise of institutional SFR companies, which together rent somewhere around 250,000 homes, and their impact on built-to-rent housing, is a new development.
“While we’re looking at slightly elevated levels of [built-to-rent] activity taking place, it still does represent a small amount of market,” said Robert Dietz, chief economist for the National Association of Home Builders. ”For the most part it’s mom and pop owners. It’s individuals, not the institutional ownership, which is hundreds of thousands rather than millions.”
Institutional SFR companies have capitalized on an increase in demand for single-family rental housing from people who since the financial collapse either can‘t or don‘t want to own a home. Between 2005 and 2016, the number of renter households increased by almost 10 million, bring the total to a record 43.3 million, according to the National Low Income Housing Coalition.
It’s hard to know exactly how many homes SFR companies are buying from home builders directly because neither party is obligated to disclose it. Sources tell Curbed that LGI Homes is the only large public home builder that has disclosed that it has sold homes to institutional SFR companies, but it’s almost certain that others have as well, even if the exchange involved just a few homes.
“[LGI Homes] is agnostic as to who they’re selling that home to,” said Jay McCanless, who analyzes home builders for Wedbush Securities. ”Their net margin ends up being the same. I think they looked at single-family rentals as a way to help add a revenue stream to what they’re already doing.“
SFR companies have been less coy. Invitation Homes, the largest SFR operator in the U.S., told Curbed that it has purchased homes from home builders upon construction “on a limited basis” in in “very select locations.” American Homes 4 Rent, the second largest SFR operator, acknowledged in an earnings call in May that it sees built-to-rent as part of its growth strategy.
Tricon American Homes, which rents more than 15,000 single-family homes, said in a May earnings call that built-to-rent is currently a small part of their acquisition strategy but could play a larger role down the road.
American Homes 4 Rent has also taken matters into its own hands by actually building its own homes to add to its existing rental stock. The program is still in its infancy; it only produced 11 units in the third quarter of 2017. But the company says it’s getting higher returns from building its own homes as opposed to buying them on the open market, and that’s as good an indicator as there is that this activity will continue.
In typical built-to-rent deals, SFR companies will buy a piece of a new subdivision from a home builder, and the deals can come at any stage of the construction process. But SFR companies owning an entire subdivision is getting more common. In Charlotte, Invitation Homes is set to own a 79-unit single-family rental subdivision called Evan Woods.
While the industry watches to see what types of formal arrangements develop between existing SFR companies and home builders, some companies have popped up that already combine the functions of both home building and property management.
NexMetro and AHV Communities are leading a wave of companies that build entire subdivisions and then rent them out. Some of the neighborhoods come with all the amenities a tenant would expect from an apartment complex, such as lawn service, a pool, gated entrances, or a spa. Other neighborhoods come with no extra amenities at all.
While the national homeownership rate has inched off its post-crash low, it remains below the historical average of 65 percent. Some of that is due to inventory shortages plaguing the housing market, which is driving up home prices, particularly entry level homes sought by first-time buyers.
Any arrangements that siphon new houses away from potential homeowners and toward institutional investors will inevitably come under scrutiny, particularly because SFR companies have been accused of mistreating tenants, automatic rent increases, and hasty eviction policies.
"I think what you’ll find is that most households do eventually want to become homeowners at some point,” Dietz said. ”We know that in the last few years one constraint...has been the lack of wage growth and the inability to get a down payment, which has resulted in a larger number of those households renting for a longer period of time.”