Rising Interest For Single Family Rentals| Ep. 87

Anna Marie (00:04):

Welcome to Street Beats Capital Markets. I'm Anna Marie Lieb, director of Investments here at Crowd Street, and I'm pleased to be joined by Zach Streit, senior Vice President at George Smith Partners. Today we're excited to dive in and discuss single family rentals. This is an asset class that has been getting a lot of press lately, as we've seen a lot of institutional players into the market. Last month, Leonard Corp announced that it would raise 2 billion to develop thousands of single family rentals. And just this past week, PSP Investments an Ottawa-based pension fund announced that they've teamed up with the investment firm Pretium to launch a joint venture that is looking to invest 700 million into the single family rental properties across major markets in the Southeastern and Southwestern U.S. Zach, what have, what have you been seeing on your end in terms of you know, the single family rental market?

Zach (00:50):

Absolutely. Thanks Anna Marie. Always a pleasure. So this is a fun Street Beats, cuz normally we're talking about more macro stuff, but here we're gonna be really product specific. Actually by background, I, I started off in the commercial real estate space to some degree. I didn't tell you this in the SFR space, but I worked for a predecessor company to what is now Corevest. So I, I worked at actually Colony American Finance, which was a sister company of Colony American Homes before, you know, Colony merged in eventually to Invitation Homes with a few different stops. Along the way. So I, I kind of cut my teeth on this in '14 and '15 when there was a lot of kind of, you know, just emerging large deals getting done and, and that certainly hasn't stopped during COVID. The institutionalization of this asset class has probably been almost as storied as what's going on in the industrial space.

It's still a lot smaller and it doesn't have Amazon in it, so that could be a big difference. But I mean, to your point, there's probably 10 or 15 large institutional deals that have gotten done here and probably the last six months. And another really big one is Pretium is buying front yard residential for two and a half billion. That was really big. And then JP Morgan American Homes for Rent probably got done about a year ago. It was 625 million to build 2,500 homes. So there is a flood of institutional capital that is sort of begun entering the space. And, and look, that's, that's good news for sponsor - more equity capital you know, makes deals get done. And a lot of that is like led by debt capital. So examples, just this morning we read about a deal that PCCP did with Freehold, a 180 unit townhome project and, you know, we can talk about single-family for rent versus townhome, vertical, a horizontal multi-family, et cetera.

 And that was through PCCPs 360 Communities program. And then we got an email from the Amherst guys saying, you know, hey, we, we just closed a build-to-rent deal where we were in 90% of the equity. We own, I don't know, 30,000 homes and we've got a forward commitment program where we will actually buy out projects upon completion. And we know of other large institutional sponsors like GTIS or Institutional Equity Stops, I I should say like GTIS that have similar programs that are out there. So there's a lot of capital that is kind of flooded into this space. And, and there's a lot of reasons why, and we can, we can go into some of those if that makes sense.

Anna Marie (03:24):

Yeah, definitely. And I think it's important to point out that when you look at kind of the single family rental space, I mean this really is an asset class that hasn't been institutionalized at this point. I think currently it's less than 3% of, of the market is you know, owned by institutions you know, which compared to other asset classes, you know, that that definitely isn't the case. Yeah. so, so there's a lot of, you know you know, I think practicality that that can be brought to the space if you compare like an institutional owner versus the mom and pops and, and kind of really grouping up and building these large portfolios and getting kind of that, that scale that comes along with it which is interesting in the space. And I also think, you know, a as we talked earlier, really Covid 19 has had a, a big impact in kind of also, you know, accelerating kind of this demand for, for the single family rental space. You know, in terms of people looking for, for more space. And, and not necessarily wanting to to live in the traditional apartments.

Zach (04:24):

For for sure. I think the estimate is, like you said, like 3% of single family for rents institutional versus like 55% for multi-family. So you can see the runway. And historically a big knock on the space was that it couldn't be managed efficiently. Now it can, and we know that it can, and you have the big institutional property managers that are in the space and particularly in the Build for Rent product when they're actually purpose-built communities, you can get a lot of efficiencies out of management where when you own scattered sites, I think it's tougher unless you really have a lot of scale. But I think most of what we're talking about is build to rent. And so, you know, I I think a lot of those questions kind of have been asked and have been answered. And then your point on Covid is a great one.

All of a sudden people aren't focused on, well how far is this, you know, from work? Cause a lot of these developments require land you know, large parcels of land in order to be able to be developed. And sometimes they're in more suburban locations. So we did like the first single family built to rent deal in Vegas. It was kind of what I'd call generously north Las Vegas, but it was pretty far north. But that was okay for guys who, you know, maybe aren't commuting as far or aren't commuting as often or are interestingly willing to drive the extra commute to have the space for sure during COVID where people aren't going to the office in a lot of locations, this becomes a lesser concern. And we, we already felt like there was demand that was proven out kind of for this and doing that deal.

So people are willing to trade that off. And you just get something here that you're not gonna get in a traditional stack, multi-family, you know, project where you've got people who live kind of on top of you next door to you, beneath you, et cetera. And where so much of the new product is studios, ones and twos, you know, whereas this is really coming in the call it, you know, twos, threes, and fours, but primarily it's sort of threes and fours varieties so it can appeal to, you know, sort of young families or people that are working for home and, and kind of need more space.

Anna Marie (06:27):

Yeah. And definitely it, it's interesting you, you kind of mentioned the young families. I mean, I think a lot of large driver behind this is kind of the, the millennial population. I mean, there're they're more, more we're seeing the 35 to 44-year-old demographic is, is is growing pretty strongly now due to that aging population there. And you know, unfortunately, you know, there's some strained balance sheets there. You know, they're, they're at the age where they may might be buying their own homes, but you know, can't due to student loan debts. You know, also with COVID you know, the, the increased unemployment and I know there's been, you know, a a lot of press about a lot of home sales happening, but, but if you look at who's actually getting the, the loans to, to, to purchase those new homes, you know, it's not the ones with kind of the lower credit scores.

 If, if you look at kind of the borrowing these days, I think it was approximately kind of 5% of loans were only given to people with FICO scores below 660, which is really what, you know, the single family rental pool is, is targeting, is that demographic that's looking for that housing. And, and that's just continued to grow. And I think that that's, you know, gonna go a long way to, to help kind of keep pressure on the rent growth within the space as well. I know kind of Green Streets expecting that, you know, rent growth here is going to, you know, stay at about 4% moving forward for the next three years. So, so there's just a lot of potential coming there.

Zach (07:46):

I think the deal we did in Vegas was about 75%, two and three bedroom units with the majority three. And so, you know, you you, you're not dealing with the studios in ones and I think the square footages were a thousand to 1200 square feet, and so there were more generous footprints than you'd find in the traditional multi that's being built. And you're absolutely right for people that can't afford a down payment or don't don't want to. I mean, this, this ends up being an excellent all alternative and I think the latest occupancy rate that I read about was either 94 or 95% nationally for the product type. So that's extremely high, and I think that's even a little bit higher than where multi-family is currently. And so like this is just another sort of sub-sector that seems to be outperforming traditional for, for sort of the reasons that were outlined earlier.

Anna Marie (08:36):

Definitely. Zach, I'd love to hear from you, you know, maybe a bit of on your take on kind of what the debt markets look like kind of for the single family on the built-to-rents. I mean you know, in terms of the traditional kind of Fannie Freddie that isn't potentially necessarily available for the single family rental, I believe they're kind of moving into the built to rent, but, but kind of love to, to kind of get an understanding of what you're seeing there.

Zach (08:58):

Yeah, so you definitely can't get agency financing. On the perm side you can get it. For communities that are all contiguous, and this is a newer thing, for a long time, agencies weren't lending on the space if the units were individually parceled and oftentimes they are, you know, and that presents an, an additional opportunity to sell down the road. But our latest understanding is that you actually can get, and you know, we've seen a few deals get priced with agency financing on individually parceled sites. Of course there's yield maintenance there. And so the idea is not that you're partial releasing and selling off units, but you're keeping this for the long term and you're operating it as multi-family, but that tail that wags the dog is huge. And in addition to agency financing, you've got specialty lenders like like coves.

So the, the, the subsequent iteration of my former shop and, and other, you know, insurance companies and sort of balance sheet lenders that will lend, you know, non-recourse, you know, on a five or a 10 year basis into the space. So the fact that you can get permanent financing is, is massive because, you know, without that it would be hard for all this equity capital to come into the space. It would also be hard for construction lenders to come into the space because really what is the exit? So now you have that. Yeah. And because of that, you are seeing a ton of construction lending activity in this space, and it begins to really mirror and resemble what's out there for multi-family. So I would say one is a very good proxy for the other in terms of leverage rate proceeds et cetera.

 Return on costs we're seeing are usually a little bit higher for this asset class than traditional multi, and looks like cap rates have started to verge on, on being the same. So there may be a little extra juice in these deals, you know, if you can find the land for them. But, you know, on the bank financing side you know, if you're looking for a non-recourse execution, you're probably in the, you know, call it 55 to 60% loan to cost range, and you're probably in the L 400 range. I'd say if you, you know, and you could easily pair that up with a Mez lender you know, that would take you up to 80, 85%. So you might blend out to call it 7% or so on your total stack. And I think you could find stretch senior financing that's probably also competitive with that, where you're getting to 80, 85% of your stack in the seven 8% range.

Big, big picture, it is incredible how multi-family financing and single-family for rent financing seem to have recovered completely. And we're seeing proceeds in pricing on the debt side that are comparable to what we were seeing pre COVID. And that's for multi-family at large and single family for rent. I would say you aren't seeing an urban cores yet that that's the one sort of area of question mark, but generally this single family for rent product that we're talking about isn't being built in urban cores for the most part, right? It's being built in more suburban locations and, you know, secondary markets and places like that. And so, you know, pretty high leverage financing, you know, certainly over 80%, you know, without upside participation, a lender on a non-recourse basis is definitely available. And again, I'll end where I started. A lot of that is because folks know that they can underwrite the perm takeout and that there's a few different buckets and options that can be pursued to get that there. It's, it's just been an incredible growth story in the space because of that.

Anna Marie (12:22):

Definitely. Well, Zach, you know, as always, I appreciate the time today to our viewers out there, you know, hope you enjoyed the insights on the, the single family rental space. And until next time stay safe and we look forward to, to chatting again.

Zach (12:38):

Likewise. Thanks Anne Marie. Talk to you later.