• More Growth Seen Ahead for Investors
  • Business Is Still Fragmented; Open to Consolidation
  • Trend Is Driven by Consumer Demand

The growth in the single-family rental market has been labeled by some as a soon-to-be passing fancy — a fad that will cease to exist once the housing market rights itself. But panelists at ULI’s Fall Meeting in Chicago say the niche business is here to stay.

John Burns, who heads his own 45-person marketing and research firm in Irvine, Calif., said 11 percent of the nation’s housing stock – some 14.5 million units – are either rental houses or condominiums. About 11.8 million of those are detached rental homes, he reported, 2.8 million of which were added in the last year alone.

Furthermore, Burns sees “huge” growth ahead. “Investors all over the world see safety and opportunity in the U.S. housing market,” he said. “They’d rather buy U.S. real estate than gold.”

The professional single-family market has legs, agreed Dennis Cisterna, a senior vice president in the Los Angeles office of Johnson Capital, where he is the co-head of the opportunistic finance group. “It’s been here all along, it’s just been done by Mom and Pop landlords” who own a handful of investment properties.

George Casey of Stockbridge Associated said the trend reminded him of the 1920s-‘40s, when builders sold homes to anyone who could muster a 40 percent down payment and rented the rest.

Then, he said, the Federal Housing Administration came along with its lower down payments, and Fannie Mae and Freddie Mac began to securitize loans.

According to Doug Brien, managing director of the Waypoint Real Estate Group, a player in the single-family rental market, builders are coming to him, asking Waypoint to “take down” the first 10 units of a new project to get it started or the last 10 units “at a discount” to close the project.

Brien started in the niche in 2009 as a personal investment, but soon realized he could make a business of buying and renting single-family houses. Now Waypoint has 580 employees, a portfolio of 5,000 houses, and has just merged with the Starwood mortgage real estate investment trust. The business is now known as Swaypoint, he said.

Early returns for the business gave investors and internal rate of return of 20-plus percent. And now Brien is looking for some consolidation in the business as firms like his buy out small-time landlords.

Burns, a market researcher, said one of the reasons the product makes sense for investors is that it “makes all the sense in the world for consumers.”

Some residents distrust small-time landlords who may not be as professional as larger operators, he said. Other are saddled with so much debt that they can only rent. Still others may have the wherewithal, but have lost previous homes to foreclosure and don’t want to go through that kind of traumatic experience again.

“A large portion of the recovery will be driven by people who experienced a foreclosure,” he said. “Say what you want about them; they really helped clean up this mess and are the ones driving prices higher. A huge portion of the recovery is being driven by them.”

Another panelist, MarySue Barrett, president of the Metropolitan Planning Board, an independent agency in the Chicago area, called the trend “a sleeper that has become a hot topic.”

Just now reaching what she called “the tipping point,” the single-family rental market is “not mature enough” to have a best practices manual. “We’re still searching for that,” she said.

Meanwhile, Cisterna of Johnson Capital, said financing for the segment is “still highly fragmented,” ranging from hard money lenders who can close quickly to money center banks and institutional investors with big lines of credit buy short-term windows. For now, he says, most of the money for single-family rentals is coming from community and regional banks.

What lenders find most intriguing is the exit flexibility of their investments, he also said. Owners can either keep the units, sell them to another landlord or sell them to individual buyers, “No other asset has that type of security,” he beamed. “That’s a great benefit for lenders.”