Don’t have time to read? You can listen to this episode from The SFR Pulse podcast using the audio player below.
Let me begin with the conclusion: more than a trillion dollars in US real estate equity is going to be consolidated over the next decade. The Single Family Rental industry, which emerged as an institutional asset 10 years ago, is being reborn as a commercial real estate food group now. The apartment industry is adopting single family rental, and things are about to get really interesting.
To see where the path of Single Family Rental is likely to lead, look at the path of it’s more mature cousin, Multifamily Rental, more than 25 years ago.
In 1979, in an effort to reduce inflation, the Federal Reserve raised the discount rate it charged banks to a level that made many of them insolvent. Then, just two years later, Congress deregulated the same banks, allowing them to offer a wider spectrum of financial products, including variable rate commercial mortgages. The combined impact of these two government actions was to (a) render the business model of savings and loans unworkable, and (b) give them a license to gamble to make up the shortfall. Many gambled on risky loans to commercial real estate developers, a business they didn’t have experience in.
By the end of the decade, the music stopped, over 1,000 savings and loans went under, and $400 billion in distressed assets needed to be packaged and sold. The Resolution Trust Corporate was formed to resolve the crisis, and a fire sale ensued.
Commercial real estate operators and financial institutions stepped in to capitalize on the opportunity, and the modern era of institutional real estate investment was ushered in. To add fuel to the flame, the RTC offered very attractive seller financing to enable buyers to leverage their capital 3 to 1.
This chart illustrates how the total asset value of just one form of institutional real estate investment, REITs, rode the wave of this trend.
It’s uncanny how the experience of the last ten years in the housing market runs parallel. Clumsy government action set up the unintended consequence of risky real estate lending, just like in the 1980’s. A wave of distressed real estate hit the market, threatened the overall economy and spawned a government-sponsored bailout.
Smelling blood in the water, deep pockets converged for the historic opportunity. The early players were first attracted by the short term trade, but stayed and built long term businesses. The market liked what it saw. Just like last time.
The government liked what it saw too, and has begun offering fantastic financing options. Last time it was seller financing from the RTC. This time is Freddie Mac, and soon probably Fannie Mae and FHA, who are creating the lowest cost financing ever offered to SFR owners.
In the 20 years following the savings and loan crisis, over $1.8 trillion in multifamily asset value was consolidated by institutional investors. If the pattern holds, capital will flow into SFR over the next decade on a similar scale. Existing players will expand and new players will enter.
And then there’s this. Some of the new players in SFR are folks from the Multifamily industry. As evidence, take a look at the sponsor board for the upcoming IMN Single Family Rental conference. This is the event of record in SFR, and I don’t ever recall seeing a presence from the commercial real estate industry. But there they are. And we welcome them with open arms.