Move into home rentals prompts growing outcry

Single-family home rentals are gaining favor with institutional investors, but groups ranging from tenants and homeowners associations to state officials and the Biden administration are pushing back, citing landlord abuses and property neglect.

Investors see the sector as a growing property category with a supply-demand imbalance that gives landlords the ability to raise rents, providing investors with an income stream that could potentially keep up with rising inflation. Capital raised in funds dedicated to the sector surged to $14.4 billion in 2021 from $440 million in 2020, according to Preqin. So far this year, three funds have closed on $2.1 billion as of May 16.

But not everyone is happy to see the flow of institutional capital into the sector.

The White House has released a housing plan that aims to tip the scales in favor of homeowner occupancy over companies buying homes to rent, while members of Congress are pressuring federal housing agencies and the largest single-family rental landlords, attempting to keep housing affordable.

Minnesota is suing Pretium Partners LLC, its property manager unit Havenbrook Homes, and Front Yard Residential, a real estate company owned by Pretium and Ares Management Corp. Ares is not a named defendant in the lawsuit. The companies together own more than 600 single-family residential properties in the state. The defendants are being sued for alleged poor property maintenance, lead paint, rodent infestations and tenant evictions during the pandemic, among other issues.

Single-family tenant groups also have formed to push for reforms and homeowners' associations are trying to prevent investors from buying properties in their developments.

Single-family rental is a fairly new niche institutional real estate investment strategy that started with real estate managers, including Blackstone Inc. and Starwood Capital Group LLC, buying homes in foreclosure during and after the global financial crisis. The firms bundled the properties up and eventually spun them into real estate investment trusts that are today some of the largest landlords in the sector.

But it was only in the last few years that institutional investors began ramping up investment in the strategy in a big way.

In July 2021, real estate investment trust Tricon Residential Inc. created a $5 billion single-family home joint venture with the $204 billion Texas Teacher Retirement System, Austin, Pacific Life Insurance Co. and a third institution initially committing a combined $1.4 billion in equity. The joint venture plans to invest debt and equity to buy homes in the U.S. and rent them out.

At the end of 2021, the C$539 billion ($431.8 billion) Canada Pension Plan Investment Board, Toronto, linked up with real estate manager Greystar Real Estate Partners in a $840 million venture to build and acquire single-family home communities. And in May, the $40 billion Indiana Public Retirement System, Indianapolis, committed $30 million to real estate manager CenterSquare Investment Management for a dedicated single-family rental co-investment fund.

Aon PLC's real estate consulting subsidiary, Townsend Group LLC, said that $60 billion has been raised or committed for build-to-rent housing as of September 2021, according to a report to the $22.5 billion Los Angeles City Employees' Retirement System. Only 2.2% of single-family home rentals were owned by institutional operators in 2021, providing "significant room for further institutionalization," Townsend said in its report. In addition, single-family homes for rent REITs have seen more than 10% growth in new leases and more than 5% growth in renewals, Townsend said.

A growing number of alternative investment managers are also jumping on board. On May 16, for example, $127 billion private equity manager Partners Group Holding AG acquired a $1 billion portfolio of single-family rental homes in the U.S. made up of 2,528 recently built houses and more than 1,000 homes to be built across 17 states in the Sun Belt. Blackstone called rental housing one of its "favorite neighborhoods" for investments, according to statements made by Jonathan Gray, Blackstone's president and chief operating officer, during the firm's April 21 earnings call.

Blackstone has a $4.1 billion single-family rental portfolio and did not evict tenants for nonpayment of rent for two years during the pandemic, according to its website. Also, the Blackstone Real Estate Income Trust acquired single-family rental company Home Partners of America for $6 billion in June 2021.

Lenders also are getting into the action. In April, Second Avenue Group, which manages $2 billion in single-family rental properties in the southeastern and southwestern U.S., raised $250 million in equity and debt capital from private credit manager Monroe Capital LLC. In March, Second Avenue received $500 million from real estate manager Waterton, and $150 million from another real estate manager, BLG Capital. Second Avenue plans to invest up to $1 billion a year.

Rising interest rates, inflation and growth in rents are enticing investors into the sector, said Nancy Lashine, New York-based founder and managing partner of Park Madison Partners LLC, a boutique real asset private equity placement firm. Investors have an appetite for any kind of real estate such as single-family rentals in which there is rent growth and a supply-demand imbalance that offers good cash flow as well as an inflation hedge, she said.

"Single-family rentals is a very new space … with so much more demand than supply," Ms. Lashine said. The pandemic only increased demand for homes with more space, and people are willing to rent homes to get it, she added.

"There's a huge appetite for it (single-family rentals) ... a lot of capital is available" for both specialty managers and as part of diversified funds, Ms. Lashine said.

But stakeholders are now trying to slow the roll of real estate companies moving into the business, asking for reforms of investments that they say block people's route toward accumulating wealth through homeownership.

On May 16, the White House released a Housing Supply Action Plan, in part, to "ensure that more government-owned supply of homes and other housing goes to owners who will live in them — or non-profits who will rehab them — not large institutional investors."

The Biden administration is not alone in pushing back against companies buying up single-family homes to rent out. On Feb. 10, Minnesota Attorney General Keith Ellison sued HavenBrook Homes, Front Yard Residential and Pretium Partners for failing to "repair and maintain rental homes that lacked heat, had backed-up sewers, doors and windows that would not close, mold, even wild animals" and had also violated Minnesota's lead paint rules. Front Yard has been owned jointly by Pretium Partners and Ares Management Corp.'s real estate and credit funds since January 2021. The lawsuit is in discovery and the companies are asking the court to dismiss the case.

In January, Sen. Elizabeth Warren, D-Mass., sent a letter to three of the largest investor owners of single-family homes: Progress Residential, the single-family rental management platform of real estate manager Pretium Partners, real estate investment trust Invitation Homes Inc., and American Homes 4 Rent, another REIT — about increased acquisitions, rent and fee hikes, and evictions. All three companies responded in letters to Ms. Warren saying that they increase the supply of rental housing for people who prefer to rent.

Meanwhile, a budget proposal in California introduced on April 28 would create a fund to give first-time homeowners capital to successfully compete against real estate companies that have the wherewithal to buy homes for cash.

Josh Pristaw, Pretium's New York-based senior managing director and co-head of real estate, said in a written statement that "at a time when housing is in short supply across the nation, Pretium provides access to quality, affordable homes for those who choose to rent."

In 2021 alone, Pretium renovated nearly 14,000 homes, averaging an investment of $34,000 per home. Pretium is also working with community groups, he said.

"As part of its commitment to community engagement and affordable housing, Pretium partners with approximately 80 state and local public housing agencies across the country on the Housing Choice Voucher program," Mr. Pristaw said.

Some renters are taking their case to institutional investors that are investing in the space. In April 2021, renters of Front Yard homes spoke at a meeting of the $450.7 billion California Public Employees' Retirement System, Sacramento, asking the pension plan to pressure its manager, Ares, to rectify poor conditions and stop it from allegedly evicting tenants despite a COVID-19 eviction moratorium. However, while it is an investor in Ares funds, CalPERS isn't an investor in the particular fund that owns Front Yard Residential, pension fund officials said.

Arianna Anderson said in an interview that she has lived in her rented single-family home managed by Pretium's HavenBrook Homes for seven years under the federal Section 8 housing choice voucher program. The older home has a crooked foundation, issues with the heater, door knobs that fall off, pealing lead paint and mold in the bathroom and kitchen walls.

"The foundation was neglected so badly that the home is not able to hold heat ... My 5-year-old's room measured 58 degrees with the heat set at 90 degrees," Ms. Anderson said.

After years of first complaining to HavenBrook Homes to no avail, then organizing with other renters and finally commencing a rent escrow action by paying her rent to the court instead of the landlord, she said, HavenBrook agreed to relocate her family to another home and rehabilitate the property.

Jim Baker, Chicago-based executive director of the non-profit Private Equity Stakeholder Project, said the group is "concerned about private equity firms and other large Wall Street firms buying up housing and either not performing maintenance and making housing unlivable or making homes less accessible to first-time home buyers and pushing up people's rents to levels that are unsustainable."

The group also said that corporate landlords evicted tenants despite pandemic moratoriums. Since the start of the pandemic through October, private equity firms and other large landlords filed to evict more than 124,000 families in Georgia, Florida, Texas, Arizona, Tennessee and Nevada, according to a Private Equity Stakeholder Project analysis.

But industry trade group National Rental Home Council said that institutional owners account for only a tiny portion of institutional single-family home rentals. It estimates that there are about 300,000 single-family home rentals, including tracks of homes being built to be rented, that are owned by institutional operators, or about 1.5% of the 22 million single-family rental homes.

"That likely is growing but certainly has a long way to go before it gets to" the same level of institutional ownership as multifamily housing, said David Howard, Washington-based executive director of the National Rental Home Council. "When you're talking about a market of 22 million homes, the vast majority of which are not owned by large companies ... it's a little head-scratching why large companies take the brunt of that criticism."