Where Does Institutional Money Stand with SFRs?

IRVINE, CA—Fewer acquisitions by institutional players in the single-family-rental market are what's in store as the market reaches more normal levels, predicts Daren Blomquist, VP of RealtyTrac. As GlobeSt.com reported last week, after the release of its report on where institutional players were most likely to remain landlords, Blomquist told us, “Some of the markets that were originally darlings of the single family rental operators have fallen out of favor in part because of new construction that will now compete with the existing single-family rentals, but also because of rising prices that make acquisition costs much higher and therefore returns less attractive. These markets include parts of California as well as even markets such as Phoenix and Las Vegas and to a certain extent Atlanta.”

We spoke with Blomquist about the recent pullback of institutional capital from this market, this investor segment's perspective on the market and what it means for the future of this sector.

GlobeSt.com: What's your view of the overall landscape of institutional capital in the single-family-rental market?

Blomquist: You'll see fewer acquisitions going forward. The data in our last report shows that in the third quarter of 2014, 4.3% of all sales went to what we would classify as institutional, which is down from 5.3% the year before, and it was 4% before this surge in 2012. It's returning more to a normal level in terms of the acquisition of new properties. So, I think what we're going to see is a transition out of that phase and into the phase where we're focusing on creating the most efficient property management they can. Also, we'll see the securitization of their portfolios, which we've already seen happening already for some companies. The big institutional players will be in the market for at least another three years and then hold onto their portfolios.

GlobeSt.com: Is this market still as attractive to institutional capital as it was earlier in the recovery?

Blomquist: I think that some of the mid-tier to small-tier players will begin to sell off some of their inventory to some of the big players or possibly to small investors or owner-occupants. That's one of the things to look for in 2015—how much will those owner-occupants step into the gap left by the institutional investors as they slow down their acquisitions?

GlobeSt.com: What are the fundamentals drawing institutional capital to this market, and are they still present?

Blomquist: They are not in most markets, but they are in some. However, it's a shrinking number of markets where those fundamentals are present that attracted them to the market in the first place. Number one is the amount of distressed inventory that could be purchased at a low price point. Distressed inventory is drying up. Also, in general, finding markets that have the price points that will work for them, which is generally $150,000 to $200,000 for a property, is more difficult now. Whether distressed or regular inventory, there are fewer markets where that price point is readily available, and so those two pieces are becoming less common for them.

GlobeSt.com: What is the end game likely to look like for institutional capital in the single-family-rental market—and how soon?

Blomquist: For those players who say they're in it for the long haul, there is no end game. But there are two different types of players. The first are those who take advantage of a window of opportunity, and when it closes, they'll move to another place to place their capital. The second are those who will stay and become long-term players. The genius of this strategy is that you are taking advantage of a higher-renter population now, but a lot of them will be in a position where they're qualified to buy again, so there will be a demand surge for buying homes and that will give them a strategy to exit the market. That will be the end game for many of them, but a few will be staying for the long haul.

GlobeSt.com: What else are you noticing that's of interest?

Blomquist: There is one other evolution, which is interesting and maybe not expected. Some of these players are slowing down their acquisitions, but are getting into the financing arena. Blackstone, for example, via B2R Finance, lends money specifically to investors purchasing single-family rentals. We're seeing more capital flock to that as other companies are getting involved in doing that. It's filling a gap because of the tight lending standards and providing asset-based lending—not based on credit scores, but on the underlying asset. It's another evolution of this whole industry.