A fragmented market and growing demand for rental housing puts larger companies in the single-family rental sector in a strong competitive position, according to some market observers.
In a webinar hosted by real estate research firm Green Street Advisors, Don Mullen, CEO and chief investment officer of Progress Residential Master Trust, a private REIT, said current conditions are creating “tremendous opportunity” in the sector.
Mullen noted that 98 percent of single-family assets are in the hands of “relatively inefficient” operators that lack the scale of Progress Residential and other large players in the sector. According to a new Green Street report, the largest companies in the sector possess “meaningful operating advantages and have the ability to continue to scale their platforms.”
Progress Residential has already acquired more than 20,000 homes in 14 core markets.
“We see a persistent opportunity to acquire high-quality homes at attractive yields,” Mullen said. “We believe this is a demographic- and technology-driven opportunity, and not, as people initially perceived it, as a distressed real estate opportunity,” he added.
Mullen pointed out that the bulk of the company’s portfolio was acquired on a one-off basis, a strategy he expects it will continue to pursue.
Persistent Demand
Changing demographics and adjustments to federal housing policy are likely to support the single-family sector for the foreseeable future.
Mullen cited data from the Urban Institute showing that close to 60 percent of new household formation in the period from 2010 to 2030 will come from renters. The likelihood of tighter mortgage credit is expected to underpin that demand.
Green Street noted in its report that one of the first acts by President Donald Trump’s administration was to reverse a recently announced Obama administration policy that would have reduced mortgage insurance premiums paid by borrowers on Federal Housing Administration-backed loans. The housing finance landscape may see “meaningful change” under the Trump administration, according to Green Street.
The Green Street report pointed out that starter home construction, which is the closest comparable price point comparison for single-family REIT rental stock, is 75 percent below levels seen prior to the housing crisis. “This lack of new supply has contributed to the healthy pace of single-family rental rate growth and home price appreciation,” according to Green Street.
In 2016, Progress Residential maintained occupancy at around 95 percent, and new rent growth was 5 percent. Mullen said same store NOI growth is projected to be better in 2017 than 2016, while rent growth in 2017 is projected to be in the range of 4 percent.