The 3rd Annual IMN Single Family Rental (SFR) Investment Forum was held at the Loews Hotel in Miami Beach last week. Over 1,000 SFR professionals attended the forum, including buyers, investors, lenders and service providers. The number and range of attendees at this year’s conference demonstrated significant enthusiasm for a growing and vibrant SFR industry.
The conference was held at a cross-roads in the SFR market, as the focus of SFR begins to shift from large, institutional investors, owning tens of thousands of houses, to smaller, “mom and pop” investors who own anywhere from one to a few hundred houses. The first two multi-borrower SFR securitizations (offerings from FirstKey and B2R) hit the market shortly before the conference. Dechert’s own Gennady Gorel led a dynamic panel on the creation of multi-borrower securitizations and the future of the market.
After a few days of listening to panels and speaking with investors and lenders, a number of trends emerged, which we will continue to focus on as the market evolves:
- Institutional investors have significantly slowed the rate at which they are accumulating properties. Although institutional investors were the early drivers of the SFR market, and the first to tap into the capital markets for SFR, the future of the industry may well rely on the “mom and pop” investors.
- Many panelists at the conference believed that the housing market has significant room to grow. Unlike past recoveries, single family home values have not increased substantially in most regions as the economy has improved. If the economy continues to grow, many expect singly family home values and rents to increase at a higher rate, making housing an attractive investment.
- While the big investors have no difficulty finding liquidity and tapping into the capital markets, the smaller investors have been largely left behind. Not anymore. With the advent of multi-borrower securitizations, many predict a robust securitization market to develop around small-balance conduit SFR loans.
- As smaller investors begin to dominate the market, loan terms and structures will also change. The long and short of it: small investors with a value add (i.e., renovation) strategy are seeking very short term loans (120-180 days) (commonly called “fix and flip” loans, which investors plan to refinance with a term loan after renovations are completed), and investors with a hold strategy are seeking longer term loans (10-30 years), similar to products currently offered in the owner occupied residential market. The terms differ from the standard 5-year loan (or 2-3 years with multiple extension options) favored by the institutional investors. As the market for SFR loans evolves, many expect underwriting and loan terms to evolve towards a traditional owner-occupied residential model.
- As the demand for small balance, owner-occupied style loans increases, the CMBS securitization model utilized on single-borrower deals will likely evolve towards an RMBS-style platform. We are curious whether SFR will be able to maintain its status as an independent asset class if the loan terms, underwriting and securitization structures begin to overlap heavily with RMBS.
- SFR is a likely space for crowdfunding to gain mainstream acceptance in commercial real estate. The nature of the SFR market – individual investors seeking small balance equity investments and debt – creates a manageable scale for “peer to peer” investment and lending. It was no surprise that the crowd funding community was well represented at the conference.
- Will SFR survive as a large-scale industry in the long-term? Unfortunately our magic 8 ball told us to check back later. SFR on an institutional level was the product of the largest financial and economic crisis since the Great Depression. Changing demographics and the trend among millennials to rent, rather than own, favor continued growth in the SFR market. Whether these trends are a temporary reaction to the downturn, or a true shift in American home ownership patterns, will likely determine the longevity of the market.