Prior to the 2008 Global Financial Crisis, single-family rentals were a mom-and-pop asset class, one that went largely untouched by institutional investors.
But things began to change following the crisis. In 2012, government-sponsored mortgage guarantors Fannie Mae and Freddie Mac launched a pilot program that encouraged large-scale investors to purchase bank-owned properties. The rationale behind the program was simple: the presence of institutional capital would spur up demand for foreclosed properties and help revive the then-floundering housing market.
As a result, institutional investors purchased over 200,000 single-family homes worth an aggregate $36 billion between 2011 and 2017. This figure nearly doubled in 2021 alone, when investors earmarked over $60 billion to buy single-family rentals.
While large institutional investors own just 2% of the nation’s single-family housing stock today, homebuying activity paints a different picture. In February 2022, institutional investors accounted for 28% of all single-family home purchases—a record high since 2011.
Though rising mortgage rates and other economic headwinds in 2022 have dampened institutional appetite for homes, the trend is clear: Wall Street will continue to buy single-family real estate.
In fact, bulge-bracket bank J.P. Morgan Chase recently announced plans to invest $1 billion in built-to-rent single-family homes via a joint venture with real estate investment firm Haven Realty.
Likewise, Invitation Homes, a spinoff of trillion-dollar asset manager Blackstone, recently secured a $1 billion interest-only loan from Fannie Mae to buy single-family properties—a purchase that could add thousands of new units to the firm’s existing portfolio of 85,000 homes.
But why are Wall Street heavyweights like J.P. Morgan and Blackstone so keen on buying single-family homes? And what implications does this trend have for the typical homebuyer or real estate investor?
Why is Wall Street buying single-family homes?
Single-family rentals have transformed into a mainstream asset class for institutional investors because it benefits from strong demographic tailwinds, is exceptionally resilient during economic downturns, and offers the potential for higher returns.
For this reason, it’s estimated that institutional investors will own roughly 7.6 million single-family rental homes by 2030—just under half of the 16 million single-family rentals currently in the United States.
On that note, let’s take a closer look at the driving factors behind Wall Street’s foray into the single-family market.
Favorable demographics
Institutional investors are attracted to single-family rentals in part for demographic reasons. As older members of Generation Z join their millennial counterparts in the workforce, they’re shifting their preferences from crowded city apartments to more spacious and private single-family suburban homes.
In some measure, this trend can be explained by the post-pandemic shift to remote work. As lengthy commutes become less common, young adults—many of whom no longer need to live in close physical proximity to their workplaces to shave down commute times—are moving out of the city in search of larger and more affordable living spaces.
There’s also a more personal reason why millennials increasingly prefer the suburbs: they’re getting married and starting families. As these mid-career professionals shift their focus away from work and towards their young families, they’re prioritizing greater work-life balance, safer surroundings, and higher-quality schools—amenities that single-family rentals in suburban neighborhoods handily provide.
But why are young adults choosing to rent—rather than own—their single-family homes?
While there is no single explanation for this phenomenon, there’s one cause that stands out: soaring home prices and higher borrowing costs have thwarted millennials’ ambitions of homeownership and fueled the demand for single-family rentals.
In the last four years, the percentage of millennials choosing to remain renters has nearly doubled from 13.3% in 2018 to a whopping 24.7% in 2022. Given this surge in demand, it’s unsurprising that rents commanded by single-family homes have risen faster than multifamily apartments—and it’s for this reason that institutional buyers are flocking to purchase single-family properties in droves.
New technology and software
The abundance of data and the availability of technologies that can streamline data-driven decision-making has also contributed to the institutional foray into the single-family asset class.
Today, sophisticated real estate investors on Wall Street can partially or fully automate the process of appraising, acquiring, renovating, leasing, operating, and maintaining single-family rentals—leading to lower vacancy rates, higher net operating income (NOI) margins, and greater tenant satisfaction.
For example, the rise of iBuyers like Zillow, Opendoor, Offerpad, and Entera has proven that institutional investors can digitally appraise and acquire thousands of homes at once, while enterprise property management software has made it possible for large investors to scale and efficiently manage, maintain, and operate vast portfolios of single-family homes.
In short, this means that institutional portfolios spanning tens of thousands of single-family properties may not only be practical—but also profitable due to economies of scale.
Should investors and homebuyers care?
For now, small-scale investors and individual homeowners own the vast majority of the country’s single stock. However, with $110 billion earmarked by institutional investors for buying and building single-family homes, the share of institutional ownership is poised to increase markedly over the next decade.
For both mom-and-pop investors and individual homeowners, this development comes with both pros and cons.
Demand for single-family homes could keep rising
Investment firms on Wall Street have been buying single-family homes aggressively since the onset of the pandemic.
iBuyers who essentially played the part of large-scale home flippers spearheaded this trend, but soon, large institutions began to purchase and hold these homes for the long-term.
In fact, by the third quarter of 2022, 25% of all homes sold by flippers (both small-scale flippers and large iBuyers) were bought by large institutions.
While this can be ostensibly explained by the decline in demand for single-family homes by smaller investors, a more worrying explanation lies below the surface: cash-rich institutional heavyweights are competing with individual investors and homebuyers over a limited supply of homes and squeezing them out of the market.
Housing inventory could tick up
The housing market could also see a boost in inventory due to Wall Street’s investment in build-to-rent single-family homes.
After all, institutional investors aren’t just buying existing homes—they’re also building new ones. For example, rental housing investor Tricon Residential began construction on over 3,000 properties in 2021 and a further 2,500 single-family homes worth $500 million in 2022.
Other publicly-traded single-family investors, like AMH (formerly American Homes 4 Rent) are also building rather than buying. In the third quarter of 2022, the company delivered 501 new homes.
According to the National Association of Home Builders, build-to-rent starts increased by 91% in the second quarter of 2022. This arrival of new construction holes may help lower prices and make housing more accessible for homebuyers and individual investors. Unfortunately, this could also lower rents, eating into small investors’ profit margins.
Wrapping it up
In summary, Wall Street’s interest in single-family homes can be chalked up to its potential as a profitable asset class bolstered by secular demographic tailwinds.
So where does this leave you?
Our take: institutional activity in the single-family housing market is just one data point out of many to consider. If you’re a prospective homebuyer or investor, personal factors like your risk tolerance level, your budget, and your locations of interest are arguably even more important.
And with home prices expected to further decline into 2023, now could be a prime opportunity to buy so that you can build equity, generate rental income, or simply have a place to call your own.