Amid Institutional Inertia, New Opportunities Arise for Smaller SFR Investors — If They Can Access Capital

by Taylor Williams

By Marcia Kaufman, CEO of Bayport Funding

Heightened real estate investment activity in the single-family rental (SFR) market in recent years has resulted in limited supply and commensurate pricing elevations across the country.

Today, institutional investors with portfolios exceeding 1,000 units own approximately 3 percent of the 14 million SFR properties nationwide, or roughly 420,000 homes. Per a recent analysis conducted by Stateline, the nonprofit news service of Pew Charitable Trusts, as of 2022, both institutional and non-institutional investors own approximately 25 percent of all single-family homes (SFHs).

Marcia Kaufman, Bayport Funding

Statistics provided by Redfin shed further light on these figures. A record-breaking 80 percent increase in SFH investment activity occurred between 2020 and 2021 in conjunction with lower mortgage rates at that time. By contrast, 2023’s combination of a cooling market, high interest rates, increasing prices and recession fears are leading many of the nation’s larger institutional investors — many of whom purchased during the pandemic — to offload their inventory with an urgency not seen in decades. This is resulting in opportunities for individual investors to build their SFR portfolios at a time in which demand is particularly high.

The climate for growing an SFR portfolio is made more auspicious when considering institutional investors’ wary short-term outlook and quarterly reporting requirements. This is not the case for boutique investors, who can invest for long-term rental market growth and position themselves advantageously. The pullback from institutional investors is decreasing the upward pressure on SFR investment prices, opening more opportunities for smaller buyers to become active in the current market.

Yet demand is still strong. In the aftermath of the pandemic, SFRs have become another rental option for families in lieu of apartment living. In addition to areas where SFR communities are more common, such as in Sun Belt and southwestern U.S. markets, the option is also gaining more traction in the Northeast. As more workers take advantage of flexible work models, families and individuals are seeking more space and are less geographically constrained, resulting in single-family rental homes becoming an attractive option.

However, the issue is more complex than simply filling the void left by larger firms. With access to a greater supply of SFR product, smaller investors require capital to upgrade SFHs or construct build-to-rent properties.

The SFR investment market requires significant capital to create marketable product. Renters expect homes to be in great condition and to possess modern, high-quality finishes and appliances. This isn’t such a simple task for owners, as the logistics and architecture, engineering and construction (AEC) ecosystems are unpredictable. Materials and labor are more expensive, and supply chains are fickle.

At the same time, the high demand for SFRs and more attractive pricing right now mean that smaller investors should act swiftly to capitalize. Seizing the moment necessitates access to bridge capital. Not long ago, interest rates were low and capital was readily available. Against the backdrop of today’s persistent inflation, interest rates are higher, and most lenders are hesitant to provide these loans until inflation is reined in and the commercial real estate market as a whole gains more clarity.

So, just as there are opportunities for small investors, alternative lenders are seeing increasing activity. Where institutional lenders see short-term economic uncertainty, alternative lenders see demand and an industry that still requires capital to progress. In addition, these debt providers see investors that are hungry to grow their own businesses and write their own real estate success stories.

This window for smaller investors to capitalize on these conditions is likely to remain open for the time being. The Federal Reserve has signaled that it may well continue to raise rates to combat persistent high inflation, meaning that overall economic conditions for borrowers are unlikely to change in the short term.

Until institutional players see more stability, as signaled by the Fed’s easing of interest rate hikes, smaller players and alternative lenders will continue to be the most enthusiastic players in the SFR market due to their ability to create opportunities where their institutional counterparts remain apprehensive.

Bayport Funding is a commercial mortgage lending firm based in Great Neck, New York.

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