Institutional investors are getting a bad rap for gobbling up single-family rental properties. The perception is they own the lion’s share of single-family rental properties across the country. But the reality is that institutional owners make up only about 3% of the total single-family rental market in the U.S., according to a recent report by Moody’s Analytics. These include the three publicly traded real estate investment trusts (REITs) operating in the sector: AMH (formerly American Homes 4 Rent), Invitation Homes and Canada-based Tricon Residential.
While the percentage of single-family rental properties owned by institutional investors is minimal, it is growing — the number of properties held by single-family rental REITs increased by 8.4% from 2017 to 2022, according to the Moody’s report.
Although the higher cost of financing and elevated sale prices have slowed the rate of acquisitions, there’s still a long-term push, and some metropolitan areas are feeling the presence of institutional investors more than others. In Phoenix, for example, big investors own just over 14,000 properties — 8.8% of the country’s single-family inventory.
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Single-family rentals are performing well, with average occupancy consistently above 95% for the past three years. Rents skyrocketed in 2022, with year-over-year growth ranging from about 8% to 10% quarterly.
The biggest institutional investors in the single-family rental space rose out of the financial crisis when they picked up large portfolios of foreclosed properties.
“When people were foreclosed on, the [entities] that owned all of these tranches of debt didn’t want to own physical properties, so they were able to get massive discounts on large portfolios,” said Ermengarde Jabir, a senior economist specializing in commercial real estate at Moody’s Analytics. “The ability to pick up large portfolios in concentrated areas in one go at a discount has made their businesses profitable.”
That strategy is giving way to the build-to-rent trend. For institutional investors to attain the degree of profitability they’re looking for, they must have scale. But with foreclosures down from the era of the Great Financial Crisis in 2007 and 2008, they’re developing rental communities themselves.
“They need hundreds of properties in a relatively compact location to be able to achieve cost savings on capital expenditures, maintenance, property management and so forth,” Jabir said. “We’re even starting to see some traditionally multifamily-only REITs move into the build-to-rent space.”
Over the past five years, private market real estate investments have outperformed the publicly traded REIT market by about 50%. Check out Benzinga’s Real Estate Offering Screener to discover the latest passive real estate investments.
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