By Gregg Colburn (University of Washington), Rebecca Walter (University of Washington), and Deirdre Pfeiffer (Arizona State University)
A well-documented consequence of the recent foreclosure crisis was a pronounced dislocation in the single-family home market. Large institutional buyers backed with Wall Street capital emerged to capitalize on this dislocation. These firms acquired hundreds of thousands of single-family homes to create a pool of institutionally-owned single-family rentals (SFRs) in markets across the U.S. Existing research highlights both positive and negative effects of this investor activity. Analyses suggest that home purchases and subsequent investments by these actors have reduced vacancies and aided recovery from the housing bust, however, studies also show associations between institutional investment in SFRs and increases in home prices and evictions.
Absent from this scholarly conversation is a more detailed analysis of the rise of the institutional SFR industry, the motivations of the players, key industry trends, and points of differentiation among the various firms—knowledge that is critical when classifying these investors and examining causal effects. Our article in UAR helps close this breach by using a mixed-methods approach to provide a systematic analysis of the industry, its firms, and strategies employed. Our findings highlight variation within the institutional SFR investor category, offer context to help explain the outcomes identified in existing research, and underscore trends that policymakers, researchers, and advocates should follow as the institutional SFR market continues to grow and mature.
What is novel about the current iteration of the SFR industry is the institutional ownership of homes. For decades, the single-family home rental industry was the exclusive domain of small investors. Conventional wisdom suggested that the dispersed nature of SFRs would make them difficult to manage on a large scale and prevent SFRs from becoming an institutional real estate asset class. Indeed, only about one-quarter of SFRs were owned in portfolios of 10 or more properties in 1996. However, this assumption changed in the aftermath of the housing crisis, as rapidly declining prices for single-family homes, mounting foreclosures, and limited access to mortgage credit increased demand for rentals. These dynamics enticed sophisticated Wall Street investors to enter the SFR industry in 2009 which prompted observers to identify SFRs as a new, institutional asset class. Beginning in 2012, many of these firms became publicly-traded Real Estate Investment Trusts (REITs) following initial public offerings of common stock. By 2019, these firms had accumulated a total portfolio of over 200,000 homes worth in excess of $30 billion.
All companies that have publicly-traded securities in the U.S. are required to file reports with the U.S. Securities and Exchange Commission (SEC). The public disclosure of this information provides investors with details on the strategy, management, finances, and potential risks of issuers of publicly-traded securities. Using the corporate filings, we conducted financial and content analysis to understand the evolving characteristics and behaviors of these key players in the institutional SFR industry. These two methodological approaches complement one another and, to the best of our knowledge, have not been used previously to analyze this industry.
Industry-Level Themes. At the industry level, multiple major themes emerged:
- New Asset Class. All of the firms in our sample emerged in the aftermath of the Great Recession and foreclosure crisis, and began purchasing homes in one of two ways: 1) as subsidiaries of major investment firms or 2) as small companies prior to the creation of the corporate entity.
- Industry Growth. The speed with which the institutional SFR industry achieved significant scale is notable, going from non-existent to a new asset class with over $30 billion of invested capital in less than a decade. The growth of the industry is directly correlated with market conditions.
- Consolidation. In the last five years, institutional SFR ownership has become highly consolidated. The two most dominant, publicly-traded players in the institutional SFR industry– Invitation Homes and American Homes 4 Rent–collectively owned 130,000 SFRs at the end of 2018.
- Geographic Focus. A combination of low housing prices and strong rental demand have motivated investors to purchase homes in remarkably similar cities. For instance, Invitation Homes “invest[s] in markets that we expect will exhibit lower new supply, stronger job and household formation growth, and superior NOI growth relative to the broader United States housing and rental market” (“Invitation Homes Inc. Form 10-K for Fiscal Year Ended December 31, 2018” 2019, p. 6).
- Response to Changing Market Conditions. These firms were created to capitalize on dislocations in the housing market. Thus, increases in single-family home prices during the 2010s posed a challenge for this industry. Firms have primarily responded by: a) decreasing in acquisitions, b) using different approaches to acquisitions, and c) increasing home dispositions in 2015 – 2018.
Company-Level Themes. We also discovered points of differentiation within the institutional SFR industry based on the firms’ market positions, strategies and unit management. For instance, firms pursued different home acquisition strategies. The first group, which includes Invitation Homes and its merger partner, Starwood Waypoint, strives to achieve locational density. The second group, which includes American Homes 4 Rent, strives to achieve locational diversity.
The results of this study offer several potential avenues for future research. First, does concentrated ownership of SFRs provides an owner with additional rental pricing power that would not be available to single-owners or institutional owners with more distributed holdings? Second, do institutional SFR firms crowd out potential homeowners in markets with high levels of institutional SFR ownership? Third, is the institutional SFR model a sustainable business? Prior to the crisis, this business model did not exist due to operational concerns about managing portfolios of SFRs that are widely dispersed. The substantial reduction in home prices during the crisis created an opportunity for institutional players in the SFR market. As housing markets normalize, can the SFR model persist? Finally, as this paper was being revised prior to publication, the COVID-19 crisis emerged and the implications and consequences of this pandemic on the housing market remain unknown. But, it is important to highlight the fact that the prior economic crisis of 2007-2009 created this investment opportunity and the virus-driven financial dislocation of 2020 could create another such opportunity for investors with capital.
Gregg Colburn is an assistant professor in the Runstad Department of Real Estate at the University of Washington. Dr. Colburn’s research interests include housing policy, housing markets, and homelessness.
Rebecca Walter is an assistant professor in the Runstad Department of Real Estate at the University of Washington. Dr. Walter’s research interests include federal housing policy, residential and commercial real estate and the spatial distribution of crime, and residential mobility and access to housing.
Deirdre Pfeiffer is an associate professor in the School of Geographical Sciences and Urban Planning at Arizona State University. Dr. Pfeiffer’s research interests include housing as a cause and effect of growing social inequality and the role of housing planning in meeting the needs of diverse social groups.