As interest rates soar, Wall Street single-family home investors see opportunity
Two new Single Family Rental (SFR) securitization deals sponsored by large institutional players – often referred to as “Wall Street” investors – entered the private label market in June, adding to the total number of deals for the year 10
The healthy volume of SFR supply in the first half of 2022 will be fueled by a strong SFR market resulting from rapidly rising interest rates and a tight housing supply. This dynamic makes it much harder for many to buy homes, helping to increase demand for rental properties, leading to rapidly increasing rents.
This rental income serves as the underlying revenue stream for these institutionally sponsored private label securitizations.
The upward pressure on interest rates increased with the federal reserve announced today, June 15, that it will hike the federal funds rate by 75 basis points – a rate hike not seen since 1994. With rising interest rates expected to continue fueling demand for rental housing, SFR securitizations are likely to continue to grow going forward – with institutional players looking to expand their reach in the market, which in many ways is becoming more attractive in an upward cycle .
“Despite growing appetites, institutional equity ownership in SFR is still valued at only around 2% today.,“, a market insight report by MetLife investment management (MIM) States. “MIM believes that institutional SFR ownership is likely to increase significantly over the next decade.
“MIM’s analysis shows that a simple shift in institutional ownership of SFR from 2% today to 10% [of the investment-property market] will require over $200 billion in incremental debt financing in the future.” The majority of second homes and investment properties today are owned by smaller real estate firms and so-called “mom-and-pop” investors.
One of the new SFR deals hitting the private label market this month involves the biggest player in the space, progress housing. The SFR platform recently unveiled its fifth securitization transaction of the year dubbed Progress 2022-SFR5, a one-borrower, one-loan transaction.
Progress SFR’s new offering includes a $632.3 million fixed rate loan for five years German-American corporation secured by mortgages on 2,273 income-generating single-family rental homes, according to a presale bond rating report by Kroll Bond rating agency (KBA).
About two-thirds of the properties affected by the Progress transaction are located in the Sun Belt markets of Atlanta, Jacksonville, Las Vegas, Phoenix, Tampa and Nashville, the KBRA report said. The Progress Residential SFR platform was launched in 2012 “to capitalize on the dislocation in the US housing market” in the wake of the global financial crisis, reports KBRA.
“As of June 2022, Progress Residential had approximately $19.9 billion invested in its portfolio of more than 80,000 properties,” the KBRA report continues. “Progress is the largest private owner-operator dedicated to acquiring, leasing and managing SFR properties throughout the United States.”
Also with a new SFR offer this month is FirstKey houses. The most recent Securitization Agreement, titled FirstKey Homes 2022-SFR2, represents FirstKey’s third SFR offering (despite the label) in 2022. The Securitization Agreement is backed by a $1.4 billion, five-year fixed-rate loan, granted by Morgan Stanley Mortgage Capital Holdings. The loan, like the Progress offering, is secured by a pool of 3,882 income-generating single-family rental homes
The majority of the properties involved in the FirstKey Securitization are also located in the Sun Belt markets, with Atlanta, Charlotte, Houston and Dallas being the leaders. According to KBRA, FirstKey Homes’ portfolio of single-family rental houses comprises around 45,000 properties.
Unlike more traditional residential mortgage-backed securities (RMBS) deals, where bonds are directly backed by mortgage pools, a single-family rental security offering is backed by a single loan, which in turn is backed by an income pool. Manufacture of single-family houses.
KBRA bond rating data shows that the 10 SFR securitization transactions it has tracked so far this year included approximately $7.8 billion in loans secured by a total of approximately 25,500 single-family home rentals.
“The historically low inventory of homes for sale, coupled with a vacancy rate of around 2.5%, has positioned SFR owners for success in today’s housing market,” said Rick Sharga, executive vice president of marketing at a real estate research firm RealtyTraca subsidiary of Attom data solutions.
Sharga added that in addition to acquiring existing single-family homes in the target markets, “there has also been some institutional investor shift towards a ‘build-to-rent’ model in recent quarters.” This model involves “working with homebuilders to create new SFR inventory,” Sharga explained, “rather than competing with large investors and homebuyers for extremely limited inventory.”
As evidence of this trend, based in Indianapolis Onyx+East Partnered with earlier this year bonus, an investment management company with approximately $44 billion in assets under management. Pretium is the parent company of Progress Residential.
The joint venture “will invest approximately $600 million in the development, construction and operation of new single family rental housing projects in key markets of the Midwest and Florida West Coast,” according to the partnership’s press release for rental assembly.
The joint venture plans to build more than 2,000 single-family rental apartments with approximately 700 new apartments planned this year in suburban communities in Indiana, Ohio and Florida.
“Progress Residential, Pretium’s single-family home rental platform and a leading manager of build-to-rent communities, will operate and manage the new single-family build-to-rent communities on behalf of the joint venture,” the press release reads .