Investor Column | Institutional funds move into single-family housing as COVID-19 shifts market
Institutional investors such as REITs and private equity firms have positioned themselves to take advantage of a tight housing market and recent uncertainty due to the pandemic to increase their share of the single-family housing market. It sure sounds similar to the great recession, when institutional investors snapped up foreclosures left and right. This time though, single-family homes are taking the lead over multi-family homes for the desired domicile of choice for renters. The trend to rent single-family homes instead of multi-family apartments appears to be just getting started.
The current state of the tight single-family housing market reflects a confluence of multiple events-many of which are tied to the effects of the coronavirus.
Due to the pandemic, lay-offs and furloughs in the first half of the year prompted officials in Florida and nationwide to offer loan forbearances for up to 12 months and eviction moratoriums to keep people in their houses. The eviction moratorium ended Oct. 1 in Florida and now the CDC’s moratorium pushes that date out to Dec. 31. Tenants not paying rent may bankrupt a smaller landlord. Mortgage delinquencies are dropping, but borrowers who were 90 plus days past due soared to its highest level since 2010. Institutional investors will once again look to purchase foreclosed properties via online auction.
Another rather large change is the migration from big cities to suburbs and the migration away from multi-family apartment living based on the new reality that social distancing may still be required beyond next year and many employers have permanently adopted working from home for their employees. A single-family house can accommodate that private home office better than an apartment and unlike an apartment, it’s lawn gives a place to have separation outdoors.
One of the biggest non-pandemic pressures on the single-family housing market is the millennial generation ages 23 to 38 that number 72 million who have surpassed the boomer generation as the current largest generation. They will continue to generate new households.
The perceived answer by institutional investors to an already tight existing and new housing market is to add to their hundreds of thousands of properties already in their portfolios by buying additional distressed properties to become a rental property, and they are now creating totally new communities of homes that are all built to rent out, not sell. Imagine one of our great East Manatee County neighborhoods with 100% renters.
Should there be additional concern regarding these investor properties causing reduced home ownership, artificially raising pricing in our area and nation, or make renting single-family homes unaffordable? On the home ownership front, the answer currently is no. Home ownership has increased this year. Regarding pricing, expect that the scarcity of materials to cause price hikes, not the institutional investors. Big investors will not be interested in bidding wars, only discounted properties for cash. Finally, rental price hikes annually are easier to pass along to renters when there is less concern (for an institution) that the renter will leave to find a slightly cheaper place. So, rent prices may become over-inflated.
Institutional investors make up only 2% of the single-family rental market right now. Expect that number to increase each year due to more people choosing to rent and financial conditions keeping home ownership closer to the historical average of 61-65% instead of around 69% in the mid-2000’s.
Danny Wood is a principal and founder of SeaCoast Financial Partners. To learn more visit MySeaCoastFinancial.com. The opinions expressed in this material do not necessarily reflect the views of LPL Financial.