Single-family home rentals return – but with a twist

Institutional money managers are revisiting a successful strategy from the last financial crisis, investing in single-family homes to rent. But this time, there's a twist.

Rather than mostly buying homes out of foreclosure, managers are investing in construction of new housing developments in addition to buying individual homes for inclusion in an all-rental portfolio.

After the global financial crisis, Blackstone Group Inc. and other real estate managers bought homes in foreclosure and later packaged them in real estate investment trusts. But now, managers say they expect the sector to mature into an income-generating asset class strategy similar to apartments.

These managers say that the single-family home rental market is evolving into an institutional investment much as multifamily did more than two decades ago. Institutional ownership remains a very small part of the overall single-family home market, with 200,000 homes of the more than 90 million single-family units in the U.S., according to data from the National Rental Home Council.

Many investors already have exposure to single-family home rentals in real estate and credit funds. A number of large managers including Blackstone, KKR & Co. Inc. and Ares Management Corp. are already active in the sector.

In October, for example, real estate manager Pretium Partners LLC and Ares Management announced a $2.4 billion investment to acquire and take private Front Yard Residential Corp., the smallest of three REITs specializing in single-family homes for rent. Ares is investing capital from its real estate equity and alternative credit strategies funds.

"I spent 20-plus years in multifamily and watched evolution of professionalism, the evolution of scale and evolution of value" in multifamily, said Dana Hamilton, Pretium's New York-based senior managing director and head of real estate. "Coming into this space (single-family homes for rent), I'm seeing it again but in high speed."

KKR is also investing in the home rental strategy in both its credit and real estate businesses, said Daniel Pietrzak, partner and co-head of private credit at KKR.

"Our real estate and private-credit strategies have been working together on opportunities in the single family for rent space, with strong interest from both strategies in continuing to find new opportunities and deploy scaled capital," Mr. Pietrzak said.

In December, KKR's opportunistic private credit strategy increased its funding for Toorak Capital Partners with a $250 million investment primarily from KKR Private Credit Opportunities II. Toorak makes small multifamily, mixed-use and residential loans in the U.S. and U.K.; some clients buy the homes to fix up and resell.

KKR also made an initial minority investment with BlackRock Inc. in single-family home for rent company Home Partners of America. KKR made the investment based on its thesis dubbed the "asset-light consumer," aimed mainly at Generation X and millennials who prefer to rent major assets like homes and cars, opting to spend their income on experiences rather than things, according to a KKR white paper co-written by Mr. Pietrzak. Over the years, KKR has continued to invest in Home Partners with capital from its business development company and its private credit opportunities funds. The company has purchased and manages more than $4 billion worth of houses, the white paper said.

KKR's U.S. real estate equity strategy, through its KKR Real Estate Partners Americas fund series, also is looking at opportunities to acquire portfolios and build-to-rent homes, said Chris Lee, partner and head of real estate Americas at KKR, speaking on a panel at the Urban Land Institute Fall Conference in October. Investors are increasing their real estate allocations to get yield in today's low-interest-rate environment, he said. This interest is resulting in increased competition for safer, income-producing properties. Real estate managers like KKR are turning to narrower real estate sectors such as single-family home rentals and student housing, he said.

While not all investors are sold on the idea that single-family home rentals will be an enduring real estate sector rather than a current tactical investment, many are still interested in making small initial investments to test the strategy, consultants said. The largest institutional investors are the most interested in the newly built home strategy.

The pandemic has created more demand for single-family rentals, said Roy Schneiderman, principal, at consulting firm Bard Consulting LLC.

"The demand side is driven by three forces: lifestyle choice, economic choice and COVID," said Mike Pearson, senior associate, also at Bard Consulting. There are people who want to live in a single-family home but can't afford the down payment or qualify for a mortgage. Others, such as millennials and baby boomers who are downsizing, choose to rent rather than own. Then there is the pandemic, which is causing more people to move to the suburbs from city living, Mr. Pearson said.

Supply of these homes is limited because only about 100 to 200 build-for-rent communities have been developed in the past 10 years, Mr. Pearson said.

"There's friction with the highest and best use of the land because (homes) for sale has been really strong over the last few months and it is expected to continue to be strong," he said.

Institutional investors have noticed the trend and they are cautiously making investments.

"I don't think you've seen a huge number of institutional investors making huge bets," said Mr. Schneiderman, who works with larger asset owners that are mainly interested in direct investing strategies over funds."

Technological advancements are also making the investment strategy more attractive. Rockpoint Group LLC considered the strategy years before the real estate manager invested in it, said Tom Gilbane, Rockpoint's managing member.

On Oct. 19, Rockpoint announced it had formed an exclusive $250 million joint venture with RESICAP LP, an owner and operator of single-family rental homes based in Atlanta. Rockpoint and RESICAP plan to acquire, renovate and lease 4,500 to 5,000 single-family rental homes at prices affordable to residents of established suburban neighborhoods in the Southeast U.S., including Florida and Texas.

Earlier in October, Invitation Homes Inc. announced a $375 million joint venture with Rockpoint to acquire single-family homes to rent.

"We spent a lot of time looking into single-family homes for rent in 2009 and 2010 but found ourselves wondering how we could make it an efficient business," due to the amount of manual labor and coordination required for maintaining and managing these portfolios, Mr. Gilbane said. "It became more tenable around 2015 as we saw technology starting to solve some of the management problems at a bigger scale."

Single-family homes provide a larger opportunity set than other niche real estate sectors, he said. "There are a lot of niche asset classes out there that are attractive to investors, but the universe of potential investments is small," Mr. Gilbane said.

"With single family for rent, you can invest at scale. You are taking the world's largest asset class and making it available to institutional investors."

Institutional money managers have only "scratched the surface in consolidating what historically has been a fragmented business," he said.