Single-Family Rental Investment Market Slowing, Shifting Geographically

More Deals Occurring in the South, Midwest
By Mark Heschmeyer

After successfully increasing rents and improving occupancy levels, these large investors believe they have “got it so good” as their initial investments are showing strong returns, according to Nomura Securities International research analysts.

The SFR mortgage-backed securities market for single family rental deals has experienced rapid growth since emerging over the past two years. Institutional owners have brought 18 such transactions to market totaling $9.8 billion.

Looking ahead, Nomura now expects the pace of issuing mortgage-backed securities to slow considerably through the remainder of the year as the institutional investors move from focusing on acquisitions to improving management of their existing portfolios.

Across the eight SFR institutional investors that have issued mortgage-backed securities, the rate of portfolio growth has slowed considerably. Nomura estimates that the number of single-family homes owned by these firms increased by 44% in 2014, but grew by only 6% during the first quarter of 2015.

Assuming that the firms continue to slow their rate of growth and that 40% of the total portfolio is funded through mortgage-backed securities, Nomura estimates that the market may see an additional $2.6 billion in issuance through year-end.

Eastward Ho!

Morgan Stanley Research in its most recent analysis on this sector noted a trend among institutional SFR operators to move away from fast-recovering western markets and shift towards the South and Midwest.

Morgan Stanley thinks this geographic shift could help boost MBS issuance volumes, although still at the low end of its projections. Such a move also holds implications for property quality and realized home price appreciation, Morgan Stanley analysts noted.

The early days of the SFR market included news of major acquisition of distressed properties in places such as Phoenix, Las Vegas and Southern California, areas especially hard-hit during the recession.

Morgan Stanley’s analysis shows that houses in the West typically were acquired earlier than those in other parts of the country. Because of that, those purchases have realized more of the post-recession appreciation. And because home values fell so far in those areas, the magnitude of the recovery in western MSAs was also typically greater.

But as institutional buyers focus on deals in the South and Midwest, operating costs could go up, as most operators report spending more on rehabilitation costs as a percent of total cost on properties in the South and Midwest than they do on houses in the West. This could be an indication of lower-quality properties and/or older homes in these regions, which could also mean the possibility of higher ongoing expenses, Morgan Stanley noted.

Delinquencies Low

Separately, Morningstar Credit Ratings reported that delinquency rates across most SFR securitizations are below 1%.

With lease expirations generally rising across housing portfolios in some of the transactions, Morningstar noted that properties do not tend to be vacant for more than three to four months, further mitigating concerns over a future increase in vacancy.

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