How Will Institutional Investors Affect the Single-Family Housing Market?

How Will Institutional Investors Affect the Single-Family Housing Market?

6 min read
Phil McAlister

Phil is the founder of The Macro Meets Real Estate Newsletter, a refreshing and entertaining take on real estate investing and financial markets.

A Chicago-area native and real estate investor, Phil’s career has spanned investment banking, commercial lending, and real estate, with extensive transaction experience from multiple sides of a deal.

Experience

Working for a large national sponsor, Phil has been in charge of the underwriting, financial modeling, and valuation of over $6 billion in commercial real estate, including multifamily, medical office, self-storage, hospitality, and senior housing assets. Phil leads a team in evaluating commercial real estate deals nationwide and across multiple strategies including core, core-plus, and value-add, with an occasional ground-up development sprinkled in.

Phil is also involved in evaluating and negotiating multi-million dollar joint ventures with various strategic partners. In addition, Phil has been tasked with evaluating projects in Qualified Opportunity Zones, a new and exciting frontier in commercial real estate.

Phil’s passions include family, football, American history, and real estate investing, in that order. Phil resides in Naperville, Ill., with his wife Kristin and three (sometimes) perfect children, Anna, Ryan and Charlie.

Phil holds a bachelor’s degree in finance and economics from Elmhurst College.

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The trend of large institutional investors moving into single-family isn’t new, but it is picking up steam.

Blackstone made the biggest headlines moving into the space when they founded Invitation Homes in 2012 and quickly becoming the nation’s largest single-family landlord. They exited that company for a multi-billion-dollar profit via IPO, and Invitation continues to scoop up homes at a rapid pace. Last fall, they added about $1 billion in firepower to acquire more homes through a deal with Rockpoint.

While that move made others sit up and take notice, it appears that interest in the space is exploding post-pandemic. Fundrise just closed a $300 million credit facility with Goldman Sachs, allowing it to buy about half a billion dollars worth of homes.

Tricon, American Homes 4 Rent, and Brookfield Asset Management all have portfolios with tens of thousands of homes and are looking to grow.

D.R. Horton just sold a whole darn subdivision in one fell swoop.

These major players are scooping up houses like they’re Skittles.

I recently wrote an article talking about why housing might continue to boom for quite some time. The thesis is based on a massive demographic wave (the largest population segment in the country) of people just beginning to reach home-buying age, coupled with a lot of government assistance causing massive housing demand.

On the supply side, high construction costs, a shortage of available land, and stingy zoning and building departments will all serve as impediments to supply.

These institutions are tuned in to these dynamics and looking to profit from them. Throw the Wall Street demand for single-family investments onto the scoreboard for team “Housing to the Moon.”

While many millennials will successfully buy a home (and pay through the nose to do it), the continuing high prices and the lackluster job and wage growth on the horizon will drive many to rent. But given their stage in life, they’d much prefer to have the feel of a real home, not an apartment.

Many of them will find a single-family rental in a purpose-built rental community to be a great option. These properties offer great apartment-like amenities with more spacious homes and often a small yard. Usually, tenants share one wall with a neighbor or none at all.


More on today’s housing market from BiggerPockets


What does it all mean?

I think we’re in a single-family housing bubble. Bubble might not even be the right word because that implies it will pop, and soon. Unfortunately, I think it will get a lot worse before it gets better and might not truly pop at all.

As institutional landlords own a larger and larger chunk of the housing stock, there will be a new floor set under prices in certain markets, with a willing buyer always ready to step in.

Don’t panic when you hear that. Bubbles happen all the time, and this doesn’t have to go anything like the last one. No one actually knows exactly what will happen or when.

The boom is largely driven by artificially low interest rates and by financial firms with the ability to raise debt and equity at extraordinary terms due to their cozy relationships in D.C. and support from Federal Reserve policy. This puts regular homebuyers at a disadvantage, even with their own generous terms from Uncle Sam. The ones that can afford the sky-high prices will be making massive mortgage payments, even if it is at exceptionally low rates, which puts a damper on their ability to spend in other areas. People buy based on the payment, not the price.

In a normal, free economy there would be mechanisms to get this in check before it got too bad. Lenders would pull back, renters would balk at the rent and terms, builders would quickly and easily get new supply online, and prices would moderate.

Politics aside, the reality is there are no market forces to fix this.

We’ve got policies that encourage more buying—regardless of the price—and restrict new supply. The federal government bears the risk if anything goes wrong, so lenders and buyers (especially the big boys with the lobbyists in D.C.) have all the incentive in the world to stack up properties at sky-high prices. Do you think for a moment that Wall Street firms won’t get taken care of if this comes crashing down? We call this a moral hazard.

Speculators, mount up!

Speculation is rampant today, driven primarily by the Federal Reserve. Treasuries are yielding nothing, and stocks are priced for zero gains over the next decade. People are making and losing fortunes on fake worthless cryptocurrencies named after dogs and swear words. These are all symptoms of the same disease: speculation induced by easy money policies and federal spending largess.

Investors will continue to search for areas where they can get some yield and pay whatever price they need. It’s better than zero.

At some point, this all comes crashing down, but I don’t think housing will bear the brunt of it. Instead, it’ll be meme stonks and make-believe internet coins.

Many of the bonds the Fed is buying come from the very institutions buying the assets. Those who are worried that the Fed resorting to constant “money printer go brrr!” will cause massive inflation should ask themselves, “What will these institutional groups do with the money from the Fed? Buy Cheerios? Or buy stocks, bonds, and real estate?”

Inflation is already here. We just don’t see it because it isn’t captured in the CPI. If and when the printing goes straight to consumers, you’ll see consumer prices blow up like stonks. Until then, even with a few hot CPI readings, the real inflation will be seen in financial markets. That’s the dirty little secret of the Fed’s inflation.

Pension funds, insurance companies, and family offices particularly love the idea of storing their money in housing—a hard, liquid asset with a track record of appreciation.


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Making a game plan

As an investor, if you have the guts and the funds, buying a bubble that will get bubblier can make you a lot of money. The key is not to use too much leverage and make sure the darn thing cashflows.

Just make sure you’re going into it eyes wide open, knowing that you’re riding the lightning of a bubble market and planning accordingly.

To be clear, I don’t see a massive economic crash on the horizon. Likewise, I don’t think all commercial real estate is in a massive bubble (though it is all very richly valued), and I’m not calling for blood in the streets (though your “model” should always allow some probability of that).

In my arrogant opinion, this single-family bubble won’t pop the way the last one did, with foreclosures forcing tons of supply onto the market. Instead, this one will likely end with a whimper—a multi-year (or decade) process where a weaker economy, weaker job growth, aging population, increasingly burdensome government debt load, and a shrinking number of middle-class people capable of buying a home all converge to let the air out slowly. Maybe it even continues to grow, just at a weaker pace than other areas of the economy until it makes up a smaller share again.

I think the highest probability outcome is for a crappy, slow but growing, debt-laden Japan-like economy for us.

A major risk here is that this will hollow out the middle class, denying the ability to build equity in a home to a large chunk of people.

This then can spill into the political realm, where the politicians rush in to solve the problem they created but don’t realize they created, blame whatever group is most likely to win them votes, and create new rules and regulations that make things even worse.

With the largest segment of the population hitting prime homebuyer age for the next decade, this could go on much longer than anyone thinks.

Because of this, I’m ready to ride the lightning for a while. I don’t want to own a single house, I did it for a while, but that’s just not my thing. My advice is to steer clear of single-family as a long-term rental.

But I do love the idea of owning horizontal rental properties with a couple hundred for-rent homes/quasi-apartments and all of the amenities typically seen in class A apartments.

These will likely stay in high demand and will probably even benefit if the single-family market weakens, as these will remain an attractive option for renters who can’t or won’t buy a home in this crazy market.

Other than that, I’m a big fan of storage and manufactured home communities right now, and I’m very intrigued by senior housing. I think agriculture is a really interesting area as well.

Then again, maybe it all will crash. After all, I’m just a guy on the internet. Best of luck out there!