REITs and other institutional owners of single-family rental (SFR) homes make up a small fraction of the overall SFR market in the United States today, yet they play an increasingly important role in the nation’s housing landscape by boosting supply and offering flexible, high-quality housing options that have broad demographic appeal at lower price points compared to home ownership.
REITs are also supporting communities through employing local vendors, reinvesting in homes and elevating neighborhood values, and improving standards for renters more broadly. At the same time, renters who want to get on the path to homeownership are being offered ways to make that transition possible.
According to The Urban Institute (UI), as of June 2022, ‘mega’ SFR investors, a term UI uses for those companies owning 1,000 properties or more, own around 446,000 properties, accounting for about 3% of the 15.1 million total single-family properties available for rent nationwide, says Laurie Goodman, a UI fellow and founder of its Housing Finance Policy Center. Nareit estimates that U.S. publicly offered REITs own approximately 1% of the total single unit rental housing stock.
The need for additional housing in the U.S. has been well-documented. According to Fannie Mae, the overall housing stock is well below what long run demographic trends suggest is needed. It estimates that across the country’s top 75 metro areas, the cumulative shortage is around 4.4 million units. Policy group Up for Growth estimates the shortfall at around 3.8 million units.
David Howard, CEO at the National Rental Home Council (NRHC), says that “from a data standpoint, there’s really no arguing with the fact that what’s needed in this country is more housing—more housing of all types.” He notes that there is less SFR housing today than a decade ago in terms of the overall percentage of the single-family housing market.
Over the past decade, institutional SFR owners have created an alternative to the traditional mom-and-pop ownership structure that still dominates the industry today.
Institutional SFR ownership initially emerged in the wake of the global financial crisis, as investors stepped in to buy and repair distressed, neglected homes, which helped stabilize neighborhoods.
Dallas Tanner, CEO of Invitation Homes Inc. (NYSE: INVH), which has over 83,000 homes for lease, points out that “today, it’s more about building homes and developing homes,” rather than buying up existing housing stock.
Tanner notes that in the past five years, Invitation Homes has purchased just over 12,000 homes, and sold close to 10,000 homes. “What you’re seeing happen is that we’re actually developing. We’re building more homes than we’re buying right now.”
He adds that last year, Invitation Homes had 1,300 homes in its development pipeline; a year later that has doubled to close to 2,500 as the REIT partners with builders across the country. “Our goal is to continue to grow our development numbers. There’s just an amazing need for high-quality, affordable, and safe housing.”
We're building communities with state-of-the-art amenities. We have resort-style pools, gyms, community centers, dog parks, and playgrounds.
David Singelyn, CEO of AMH (NYSE: AMH), which owns nearly 59,000 properties, says the REIT will likely build 2,200-2,400 homes this year, with that number expected to increase slightly thereafter. Through its build-to-rent program, established in 2017, AMH has already delivered more than 7,000 new homes in over 100 communities nationwide and now ranks as the 39 th largest home builder in the country. “We're building communities with state-of-the-art amenities. We have resort-style pools, gyms, community centers, dog parks, and playgrounds,” Singelyn says.
For its part, Tricon Residential Inc. (NYSE and TSX: TCN), which owns and manages a portfolio of 36,000 homes, will be building or acquiring 20,000 homes over the next three years. “We’re trying to plug a gap in the housing ecosystem that is not being talked about,” Gary Berman, president and CEO, says.
“We do something critical that we are very proud of—we enable socio-economic mobility,” Berman says. Better schools and opportunities often exist in neighborhoods with a high concentration of single-family homes, he notes, adding that in the past, the way to access these neighborhoods was to buy a home that required a large down payment. “This created a significant wealth gap for families who want a better life for their children but could not afford the downpayment for a single-family home. Tricon helps eliminate this wealth gap and give families the chance to rent in desirable neighborhoods, leading to better socio-economic outcomes in the long run.”
Preference to Rent
Tanner describes the U.S. homeownership rate of around 66% as “about as healthy as it’s ever been.” He says about a third of the country has always rented—and it’s not just because people can’t buy. “Two-thirds of our customers could own a home if they wanted to. They’re choosing for two reasons—they want a leasing lifestyle because they actually like it better, or there’s a transition going on in their life.”
Home ownership has been declining nationally, but SFRs haven’t been shown to inhibit home ownership. For the top 20 markets identified by UI, 45% had smaller declines or even growth in the homeownership rate compared to the national average, and eight of the top 10 markets had smaller declines or positive growth.
Jerry Newport, a Tricon resident in Maricopa, Arizona, says the SFR model is a good choice for him, for many reasons. An older resident with children living in multiple states, he says he realized he didn’t want them to face the financial and logistical burdens associated with selling a house at the time of his passing. Newport is also happy not to have to deal with unforeseen home repair costs, and the stress of finding and vetting contractors. “That right there is such a relief,” he says.
Newport says he is also happy to be living in a community of homes, instead of leading a more isolated existence in an apartment building. “If my grandkids come to visit, there’s a huge park, a pond, a recreational facility. All of that’s available. It’s just like I own my own home.”
An Invitation Homes tenant in Seattle said their home was “perfect for our family of seven, with a spacious floor plan and a large backyard for our children to run around in. Our home came equipped with brand new appliances, which was a huge plus, and I love the idea of having a maintenance team if ever needed.”
Newport, the Tricon resident, adds that the SFR model works well for all age groups, particularly for younger renters who might not be able to afford a house. “You have a good school system, you have playgrounds and parks. These are things that you rarely find unless you’re in a large metropolitan area…for younger folks it offers them so much more in terms of education and safety.”
Goodman at UI notes that the SFR industry “provides a way for people to live in the neighborhoods that they want to live in. They are filling a market niche.”
According to AMH’s Singelyn, 15 years ago SFR homes were not as attractive of a housing option due to the lack of professional management. Today, though, “they’re well-maintained and in middle income neighborhoods with good schools—and without the obligation of ownership.”
Some renters, meanwhile, want to test a market before buying, Tanner says. “That’s where we’ve been really happy with our business model because 25% of our move-outs each year move to home ownership. We view that as a natural course of people’s housing choices.”
One argument that has been made regarding institutional SFR owners is that they are driving rents higher across the country. However, according to UI’s analysis, SFR investors, particularly mega investors, are highly concentrated in fast-growing metro areas precisely because that’s where rent growth has already occurred.
“As long-term rental operators, these investors try to pick areas that are likely to have robust rent increases, and population increases in an environment with limited housing supply is a good predictor of this,” a recent UI report states. “Investor purchases tend to lag, not lead, rent increases,” it adds.
Berman at Tricon agrees and adds that “our business strategy is very much focused on where the growth is. We’re responding to the affordability crisis in America, we’re not driving it.”
Singelyn points out that, according to John Burns Research and Consulting, it is 26% more affordable to rent than to own in the top 20 markets where AMH operates. “That illustrates why this high-quality housing option is so important in communities. If you want economic growth, people need access to affordable homes.”
The goal here is that we would do such a good job that small landlords would feel like they’ve got to elevate the way they operate.
Raising Rental Offerings
Meanwhile, institutional SFR practices have the potential to set new levels of tenant services across the rental market more broadly.
Singelyn notes that AMH’s Let Yourself In Service®, which enables prospective residents to access and view properties on their own schedules, was a “revolutionary” step in the SFR space that has since been adopted by the multifamily sector.
Tricon, for its part, released a resident Bill of Rights in October 2022 with "groundbreaking features," Berman says. The resident Bill of Rights underscores Tricon's resident-first approach and outlines the company's commitment to providing quality, move-in-ready homes with caring and reliable service. A notable aspect of the Bill of Rights includes the right to shelter: "If you sign a lease with us and the home's not ready, we will make sure you have alternative accommodation," he adds.
“The goal is always to inspire others and become a leading advocate for strong and stable rental housing,” Berman says.
Tanner, meanwhile, notes that scale drives down tenant costs for offerings such as smart home technologies, bundled internet services, air filter deliveries, landscaping, and more. He says that “the goal here is that we would do such a good job that small landlords would feel like they’ve got to elevate the way they operate.”
Path to Homeownership
While home rental provides a compelling option for many, SFR REITs know that some of their customers eventually want to buy, and they have options in place to accommodate that.
In 2022, Invitation Homes made a $250 million investment in Pathway Homes to expand choice in the housing market by helping first-time homebuyers who lack access to traditional avenues to home ownership. Pathway works directly with customers to identify and purchase a home, offering them the opportunity to first lease and then buy the home outright at a future date. Invitation also launched a pilot program, Resident First Look, in 2016 that allows residents to purchase their home before it goes on the market. The program has since been expanded to locations across the country.
The Tricon Vantage program, meanwhile, is specifically designed to provide its residents more financial independence and enable them to plan for the future. A signature component of the program involves Tricon setting the homes’ renewal rate below market levels so that families can remain in place without financial anxiety.
In addition, Tricon offers programs focused on enhancing financial health, with access to information for improving savings, budgeting, and debt management, as well as access to a credit builder program. And, if Tricon plans to sell a home, tenants are given the first right to buy. For tenants that have been with Tricon for five years or more and are in good standing, Tricon provides a $5,000 grant toward the down payment. “We think that’s a critical way to ensure that mobility. If tenants want to buy a home, we’re going to help them do that over time,” Berman says.
Meanwhile, AMH says its ability to keep rental rates affordable compared to the average monthly homeownership cost results in monthly savings for residents that support their financial goals, including a future transition to homeownership. In fact, about one third of AMH residents who responded to move-out surveys cited purchasing a home as the reason they were not renewing their lease.
While SFR REITs are working to boost the supply and quality of individual homes, they are also striving to generate a positive impact on the broader community.
Tanner says that last year Invitation Homes spent almost $350 million in local property taxes and $500 million on improving its homes—and employed local tradesmen and vendors to do so. “We’re a really good job source as a professional company that can react and respond quickly.”
Berman agrees, noting that many of Tricon’s suppliers and vendors are local. “This is a big job industry; it’s creating local jobs and supporting local communities.”
Other ways in which institutional SFR owners are helping their communities includes lowering energy costs for residents. At their new Bella Luna development in Las Vegas, for example, AMH is installing solar panels on all planned homes that are designed to reduce the resident’s overall utility costs while producing cleaner energy. Tricon has also installed rooftop solar on over 1,000 newly-constructed homes.
Invitation Homes, meanwhile, initiated its SkillUp program to partner with trade schools in its 16 markets to expand skilled trades education and close the skills gap. The REIT says it relies on an army of skilled workers to attend to a wide range of maintenance projects, and that people with specialized skills obtained through education or training has been declining in the U.S. for years.
According to the first quarter 2023 National Rental Report from national real estate brokerage HouseCanary, the uncertainty of where the housing market is headed has slowed down property acquisitions heavily, resulting in potential buyers minimizing risk by looking towards the SFR market.
Howard at NRHC points out that the path to home ownership today is taking longer, with renting often filling the gap. “What has happened over the past few years is that people are thinking differently about how they’re moving down that path toward home ownership, and SFR plays an important role in that.”
JT Graham, manager, consulting, at John Burns Research and Consulting, noted in a recent analysis that the tenant profile in professionally managed build-to-rent and SFR communities is “significantly shifting,” with a growing trend of even more tenants choosing SFR homes rather than buying. “More prospective homeowners believe that prices and rates will come down and more resale buying opportunities will emerge, so they are delaying their home buying,” he said.
This shift has led to a rise in the number of renters who are less rent-sensitive, according to Graham, creating demand for higher-quality rental properties. “These renters, by choice, value superior interior finishes, better amenities, and overall design, which were not commonly available 15 years ago,” he said.
Meanwhile, Howard says the institutional SFR model is here to stay. “It makes a lot of sense and we’re still in the early innings of where the industry is going. I think you’re going to see the companies that are in this space get larger and I think that’s very positive—not just for the rental housing market, but positive for America’s housing market overall.”