The single-family home rental market is attracting a wave of investors and lenders eager to get into a growing industry. At $3.4 trillion, the current value of the SFR market is approaching that of the entire US multifamily market of $3.5 trillion, according to a report by Walker & Dunlop.
“Since June 2020, major builders and developers have been clamoring to enter this residential market,” said Mark Wolf, Founder and CEO of AHV Communities. “They see an opportunity in a vertical multifamily model that is a unique option for apartment living.”
The steady increase in rents for single-family homes adds to the appeal of lenders and investors. By December 2021, rents were up 12% year-on-year; that’s three times the increase seen in December 2020, according to the CoreLogic Single-Family Rent Index. Markets with the biggest jumps: Miami (36%), Phoenix (19%) and Orlando (18%).
Lenders active in the SFR/BTR market run the gamut from banks, debt funds and life insurance companies to specialist lenders. As with the multi-family sector in general, there is no single solution; financing varies considerably depending on the project (construction to let, rehabilitation, roll-up acquisition) and the profile of borrowers and investors. Various financing vehicles are in play, ranging from bank bridge facilities; building loans; community term loans; securitized loan pools; mortgages and acquisition facilities to consolidate home purchases. The conditions depend on the borrower, the type of transaction and the risk profile of the project.
Capital stacks vary widely, but despite the differences between SFR and other multi-family assets, financing structures often resemble those of consumer products. “Typically it’s 30-40% equity and 60-70% debt,” said Matthew Putterman, managing director of JLL Capital Markets. The amount of equity depends on how much leverage the limited partners are willing to assume, he notes.
Construction loans for build-to-let projects are typically 2-4 years or longer, largely due to supply chain issues that hamper the delivery of construction products, according to industry experts. For those who acquire housing dispersed in a region in order to integrate them into an SFR portfolio, lenders offer bridging financing at variable rates for 3 to 5 years, with extensions, or securitizations to a single borrower.
A recent $58.3 million construction loan arranged by Walker & Dunlop for a 270-unit community in Dallas provides a typical example of BTR debt structures. The deal, secured on behalf of an institutional client, provides four-year non-recourse financing, reported Keaton Merrell, Phoenix-based managing director of capital markets at Walker & Dunlop. Terms also include two one-year extensions. Interest rate: 2.25% relative to SOFR. Loan-to-cost ratio: 65%.
Another financing strategy specific to SFR is based on a development milestone. The builder draws on his construction tool to build the project. Then, as the units are delivered in installments and they receive their occupancy certificates, an investor acquires them via a bridging loan. The loan-to-cost ratio for these deals is between 65 and 80 percent, depending on how the deal secures permanent take-home financing, Merrell reported.
The twists and turns of the subscription
Fannie Mae and Freddie Mac, as well as some life insurance companies and finance companies, will fund permanent financing for the building to lease. But the GSEs have conditions. “Both Fannie and Freddie are adamant that they will only lend on build-to-let communities and will not fund SFR portfolios that are single-family rentals on dispersed sites,” Merrell said.
In general, SFR investors and developers should expect lenders to offer terms comparable to other multifamily transactions. Yet there are key differences, such as in underwriting. Lenders will often require additional analysis of a community’s homeowners association structure and proven track record when considering financing for development or acquisition. “It’s really important to do your research and provide market research to the lender,” Merrell advised. “It should include a project valuation, floor plans, occupancy and rental income projections, and the project’s expense ratio.”
As is usually the case with multi-family investments, larger projects – or those with large institutional sponsors – often have an easier time securing debt than their middle-market counterparts. A key reason, as Merrell explains: “There simply aren’t enough banks in the space, forcing many BTR developers to opt for lower leverage or expensive mezzanine financing. “
A significant trend that has emerged recently is the multi-billion dollar inflow of equity capital, particularly from large institutional investors. As Putterman notes, one reason for this appeal is that single-family rentals are seen as a strong hedge against inflation. Many of these investors add them to their residential portfolios for diversification purposes. Strategies range from opportunistically buying homes from cash-strapped homeowners to developing BTR communities. “In 2022, we will see more investors exploiting these properties,” he predicted. “Even apartment developers are now entering the space.”
Private and public
As a growing number of recent examples show, private equity is injecting capital into the SFR industry through multiple channels. Centerbridge Partners is the lead investor in a $4 billion platform that includes, among others, Allianz Real Estate. Lennar Corp. is one of the manufacturers who will supply the product for the company. Private equity firms also go on shopping sprees. Blackstone Group, JP Morgan Asset Management and Rockpoint Group have recently acquired single-family rental companies or formed joint ventures.
Capital from outside the United States is flowing into SFR’s assets. In February, the Canada Pension Plan Investment Board (CPPIB) and LMC, a subsidiary of Lennar Corp., announced the formation of a $979 million joint venture. The partnership will target key markets with high population and employment growth. CPP Investments will hold a 96% stake and LMC will hold the remaining 4%. Initially, the joint venture will develop 1,371 properties in Boston, Denver and Miami. Also on the partners’ radar: Seattle, Dallas and Austin. And in a separate venture, CPPIB is partnering with Greystar Real Estate Partners on an $840 million SFR platform.
An example of an SFR community in high demand by investors is AHV’s Farm Haus, currently under construction in northwest San Antonio. It will consist of 142 two- to five-bedroom luxury duplexes with private fenced yards, two-car garages and smart home technology. Tenants will have access to a wide range of amenities including a swimming pool, fitness center, conference room and dog park. The $500 million deal is an example of a built-to-let construction project with financing structured as a horizontal multifamily development, observed Steve Katz, chief investment officer and executive vice president of residential real estate at Arbor Realty Trust. , which is funding the project.
Read the April 2022 issue of MHN.