4 Reasons Why The SFR Market is Calling Right Now

Strata SFR CEO, Adam Stern answers 4 fundamental questions on the current state of the SFR market, SFR investor activity, and builders in the Build-For-Rent arena.


Read the summarized transcript below.

What’s the current state of the SFR market, SFR investor activity, and builders in the Build-For-Rent arena?

Here are the 4 questions we asked our SFR audience including:

  • Private equity firms, SFR funds, Apartment REITs, and funds on the demand side
  • Builders and SFR portfolio owners on the supply side

1. Will the SFR market continue to grow and have a strong demand in 2020?

I wanted to answer that in three different segments.

  • What’s happened over the first quarter of this year
  • What’s happening right now
  • what the perception is of what will happen into the future

So for those of you, who haven’t really followed the publicly traded RIETS in the SFR segment, rent growth, and rent collections have been much better than expected. Invitation Homes, American Homes and Tricon, all during their quarterly earnings report, reported those favorable dynamics happening right now. And the result was Invitations Home stock popping up 40% and Tricon stock up 20-25%.

However, everyone thought there was going to be a big delinquency rate in Q1. Everyone thought rent growth was to be stagnant or decrease in Q1. That hasn’t been the case, which bodes well for the fundamentals of the SFR market.

Let’s not forget, if you look at the SFR market as opposed to other parts of the economy, no one knows whether or not people will go back to restaurants or sporting events or concerts after the restrictions are lifted. That’s a very murky future.

You look at commercial properties where the retail and commercial offices will have uncertain futures – will people’s behavior change in the wake of this new reality?

But in the SFR market, people are still going to need a place to live. People may not buy right now, but they certainly, still need a roof over their heads. And need quality places to live. And I think that’s going to lead us to see strong rental demand in the future.

So do I think that the SFL mark will continue to grow? Yes, absolutely. 

The fundamentals of the SFR market will be shown in a really great way in the months to come because of people’s fundamental needs and desire to want to have these products. In addition, people are moving out of population centers. We talked to two dozen builders in the Southeast over the last several weeks, and most of them are reporting better than average sales for new construction properties. Everywhere from North Carolina all the way down to Florida, they’ve been tracking where these buyers in an inordinate amount are coming from the Northeast and Midwest city markets like Chicago, New York, Boston.

So the demand and it seems like the demographic shifts toward the southeast, especially to people getting out of small apartments that want to live in houses with larger living spaces. At least anecdotally, that’s what I’m hearing from builders in terms of their home sales and certainly portfolio owners, including the big public. RIETs. They are also reporting strong rental demand for single-family units and townhome units.

Do I think it’s going to grow? It’s important to remember right now there are twenty-five million people plus out of work. If you look at the recessions of the early 90s, late 90s, early 2000s, and you look at the unemployment numbers during each one of those recessions, the monthly unemployment figures vacillated between, 2.8 million people for the recessions of the early 80s.

And that went up to like 3.5 million people for the recessions in the 90s and the 2000s. Last month’s unemployment numbers were 10x as high. So, you know, we’ve been bolstered by the economic stimulus of the government. And I don’t think Q1 is a good representation of what will happen for the next several quarters. I certainly think the number of people out of jobs, the number of businesses that will likely falter, given the restrictions that are still in place and will remain in place, is gonna have a massive effect.

So will other parts of the economy share the same effects? I think absolutely will. Single-family rental has shown to be a fundamentally sound place to have investment capital flow. Will operators succeed in still renting properties? Absolutely. I think it’s it’s one of the great things about this asset class.

2. What are the buying opportunities now for Build-for-Rent projects and SFR portfolios overall?

So it’s an interesting one because there’s a big discrepancy between what buyers are looking and what sellers are experiencing.

And I would break buyers down into two groups.

  • Buyer groups that are looking for distress. They’re purely opportunistic, looking for builders and SFR portfolios that are having a hard time right now and need liquidity and need an exit.
  •  Buyers not necessarily looking for distress. They’re more programmatic in the way they invest and see this as an opportunity to align with builders.

The second group may not have thought about Build-for-Rent before because the housing market was so robust, but because of the sentiment of the housing market slowing down, it creates an opportunity for them to align with these builders to create built for rent products.

On the other side, you have builders who built units, and the portfolio owners that manage and operate portfolios. And I don’t think as of Q1 and going into Q2, they’re feeling the pain just yet. Builders are reporting strong home sales and operators of portfolios are reporting strong rent growth and strong collections. The opportunity I see is with programmatic buyers really having an easier time aligning within a builder’s built-for-rent projects. And now that the market’s a little more uncertain, they’re really looking in that direction and thinking, you know, I was planning on selling this product to retail homeowners.

Currently, it makes a lot of sense to align with an investor and create a programmatic approach and putting it on the market as rentals in one community to an investor. It’s opportunity I’m seeing right now between building firms and investors who are looking for that kind of thing.

3.  What kind of builders are investors looking to align with and what kind of investors are builders looking to align with?

So this is interesting in the build-for-rent space. Investors are looking for builders who obviously have current projects that make are able to offer them attractive enough prices where they can hit yields and align with builders that have the experience and the track record of delivering a quality product on time and on budget. But it’s not so much about having a single good project as it is having a process for creating a pipeline of projects that can feed capital.

Sources need to build their portfolio over time. So if you’re a builder and you have one good project but don’t really have a strong land acquisition program or a strong land development program or even strong, fundamentally a strong fundamental workforce to create those products; an investor might look at that and say I don’t want to spend the time and energy to have one project bought, even if it looks good. I’d rather find a builder with a good project and an ability to create a pipeline of projects for me.

And that’s kind of builder investors are generally looking for. Are investors that have a more programmatic approach wanting to create long term relationships with these builders? Again, most builders aren’t seeing a decrease in sales volume or sales prices just yet. So, they’re not feeling the pain right now. They’re looking at this as an opportunity to create a separate line of business with investors that will allow them to do a few things, including helping them fund projects and being takeouts for existing inventory.

And, of course, being takeouts for entire projects they can contract before the building starts and have a  short exit at a certain price.

4. Are there specific markets, a STRATA SFR is particularly excited about? And what are the attributes of those markets that investors gravitate to?

Since we’re in Charlotte, North Carolina, we have a big focus on the whole southeast from North Carolina down to Florida as far west as is Alabama.

I think the southeast is going to be a big benefactor of population centers with the Northeast and Midwest markets wanting to gravitate to places with good economic fundamentals, strong job opportunities, and good quality of life attributes. The southeast markets have all of that. I think investors will ultimately gravitate toward submarkets that have better fundamentals.

Investors are gravitating to the areas that have better than the average median attributes. And if builders keep doing what they’re doing, which is focus on these areas as a place to create buying opportunities for these funds, more transactions will happen in suburban markets outside of urban cores.

Places that are considered bedroom communities of major markets are on around the southeast. And those fundamental economic drivers, those demographics, drive investors to certain places. And the builders who are smart enough to find those projects are going be the ones that win.