Single-Family Market Rents and Institutional Investors

Single-Family Market Rents and Institutional Investors

October 3, 2022
Single-Family Market Rents and Institutional Investors
Rent increases for single-family (SF) detached residential
American dream lifestyle—often regarded as owning a
property units accelerated during the COVID-19 pandemic.
suburban or outer-suburban SF home—by renting SF units.
The market demand and supply trends contributing to rising
rents—and particularly the role and impact of institutional
Decreased Supply of SF Rentals
investors in SF rental markets—have become topical due to
The supply of available SF units—either for rent or for
affordability concerns.
home purchase—has grown more slowly due to at least
three factors. First, the total stock of U.S. housing grew
Increased Demand for Detached SF
more slowly. Although it grew at an average annual rate of
Rentals
1.7% from 1968 through 2000, the U.S. housing stock grew
CoreLogic, a financial services company, reported that the
by an annual average rate of 1% in the past two decades and
demand for more living space or living in lower density
only 0.7% in the past decade—an outcome contributing to
areas grew relative to the available supply of SF properties
an underbuilding gap, discussed in a report funded by the
among families quarantined during the COVID-19
National Association of Realtors. Next, CoreLogic reported
pandemic. The report observed that the growth rate of rents
that baby boomers stayed in their homes for a median of 13
for detached SF properties departed from the growth rate of
years longer than the previous generation did, further
rents for attached properties (e.g., duplexes, townhomes,
reducing the inventory of units that can be sold or rented. In
row houses, condominiums) beginning in March 2020. By
addition, the costs of both construction materials and labor
February 2021, rents for detached properties increased
have doubled from 2001 to 2019, according to the Joint
6.5% year-over-year compared to the 0.9% year-over-year
Center for Housing Studies of Harvard University. The
rent increase for attached properties. (By April 2022, annual
National Association of Home Builders also attributes
rents for detached and attached properties grew at more
rising regulatory costs as a factor limiting housing supply.
similar rates—13.5% and 13.7% year-over-year,
Such regulatory costs include local and state regulations;
respectively.)
impact fees, which are assessed to pay for public services;
and recent tariffs placed on softwood lumber shipments,
The National Multifamily Housing Council reports that the
which affect SF construction costs. Should these factors
demand for SF rentals has risen over the past decade,
cause SF property inventories available for purchase or rent
resulting in more than 33% of all renter households living
to decline (measured in terms of months’ supply of units for
in SF rental units by 2019. The council also reported on the
sale), housing costs are likely to rise.
demographic characteristics of renters who generally prefer
SF units. In contrast to more traditional (apartment) renters
Institutional Investors in SF Markets
consisting primarily of young singles without children,
In June 2021, the Urban Land Institute (ULI) reported that
approximately half of SF renters were likely to be couples
small-scale investors own 97% of the SF rental inventory,
(with or without children). Single parents also prefer SF
meaning that the share of institutional investors would be
rentals over apartments. Some SF renters are also likely to
3%. (ULI does not provide a definition of small-scale
do more remote work and want amenities typically
investor in terms of number of units owned, but it uses a
associated with suburban communities.
definition of more than 2,000 units to define institutional
investors. CoreLogic defines mom and pop landlords as
In addition, qualifying for a mortgage may have been more
small investors who own 10 or fewer SF properties, which
difficult for some households, possibly increasing
is the definition used in this In Focus. There is no consensus
competition for SF rentals and putting some upward
whether investors owning between 10 and 2,000 SF rentals
pressure on SF rents. Various studies show that some SF
should be considered intermediate or large.) Institutional
renters, particularly those ages 25-40, may not have been
investors may consist of publicly traded corporations as
able to purchase homes due to a lack of accumulated
well as other types of business structures, such as private
savings sufficient for either a down payment or to pay down
equity funds or real estate investment trusts (REITs), which
debts to satisfy mortgage underwriting standards. In some
are organized to invest money on behalf of other investors
cases, the qualified mortgage rule may have limited the
(e.g., pension funds, university endowments, insurance
ability of would-be first-time homebuyers—particularly
companies, and private individuals). A REIT is a real estate
those with consumer debt—to benefit from the historically
company that receives certain tax exemptions if it meets
low mortgage rates. (For more information, see CRS In
certain restrictions, such as owning predominantly real
Focus IF11761, The Qualified Mortgage (QM) Rule and
estate assets.
Recent Revisions, by Darryl E. Getter.) Despite upward rent
pressures, some households may still have had sufficient
Historically, institutional investors have represented a small
income to select from a wide range of rental opportunities
share of the SF rental market, and their activities have been
and, therefore, may have been willing to achieve the
concentrated in certain locations and markets. For example,
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Single-Family Market Rents and Institutional Investors
following the 2008 foreclosure crisis—particularly in hard-
minimum property standards at closing when delivered to
hit areas such as the sunbelt (e.g., California, Florida,
the borrower, which may impose additional costs on
Arizona, Nevada) and rustbelt (e.g., Ohio, Michigan)
sellers.) However, to the extent institutional investors’
regions—REITs and other institutional investors increased
activities are likely to result in smaller inventories of SF
their investments in distressed SF properties (e.g., bank-
units available for purchase, they also result in increasing
owned properties that have been through the foreclosure
the overall supply of available SF rentals. Institutional
process due to mortgage defaults, and properties with tax
investors also have the ability to renovate numerous older
liens due to owners’ failures to pay property taxes).
homes or those in serious disrepair to satisfy minimum (or
Because distressed properties are difficult to appraise, and
even exceed) safe housing building code standards. By
clearing any surviving lien titles may take several months,
contrast, extensive home renovations may be more
purchasing foreclosures with mortgage loans can be a
financially draining for some LMI households and, in some
lengthy process, that is, if interested buyers can find lenders
cases, offset any financial wealth gains frequently
willing to originate mortgages for this purpose. Institutional
associated with homeownership.
investors can quickly raise cash, and cash purchases can
result in lower sale prices, waived appraisals, and reduced
Do Institutional Investors Facilitate
settlement times.
Affordable Housing?
Critics assert that institutional investors charge excessive
As tenants demonstrated a willingness to renew and enter
rents particularly if they own most SF rentals in a particular
into longer leases, the buy-to-rent investment strategy grew
location. Institutional investors may also contribute to the
more attractive to institutional investors. Furthermore,
displacement of LMI residents when establishing SF
institutional investors may benefit as landlords due to
communities in traditionally underserved neighborhoods,
economies of scale, referring to increased volumes that
arguably for the benefit of higher-income renters, and,
lower the average cost per transaction. For example,
therefore, reduce the supply of affordable SF rentals.
maintenance and upkeep are cheaper per unit for large
However, even though rental units provided by institutional
numbers of properties. Some institutional investors may
landlords do not specifically target LMI renters, whether
also adopt proptech (property technology), the use of digital
rents are excessive is unclear, especially when tenants are
big data and automated intelligence technologies to identify
willing to pay premiums for amenities that small investors
amenities highly valued by tenants, estimate the costs of
may not provide consistently, such as property maintenance
various property improvements, estimate cash flows (rents)
by professionals. Furthermore, in light of recent rising
generated by properties, automate the leasing process, and
mortgage rates, renting from institutional landlords may
automate property management tasks. These efficiency
still be less expensive for some families relative to SF
benefits may also enhance profitability.
homeownership.
Institutional investors have also adopted parallel investment
Current federal programs that promote affordable housing
strategies in other markets. As the number of foreclosed
objectives do not provide explicit financing incentives for
properties declined, for example, some institutional
either small- or large-scale investors enticed by profitable
investors adopted build-for-rent strategies, which consist of
opportunities in SF rental markets. For example, federal
detached SF rentals (generally three or more bedrooms) and
loan guarantee programs for SF mortgages are largely
provide similar amenities as those in new communities built
limited to acquiring owner-occupied principal residences
for homeowners. Institutional investors also invest in the
rather than secondary homes or investment rental
parks established for manufactured homes (MFHs). MFHs
properties. The current system of federal subsidies used to
are factory-built homes that can be transported in multiple
promote affordable housing (e.g., mortgage guaranty
sections and meet the safety standards set after June 15,
programs, low-income housing tax credits, new markets tax
1976, by the U.S. Department of Housing and Urban
credits, opportunity zones) typically encourages large
Development (HUD). MFHs typically are less expensive
investors to develop affordable rental opportunities in LMI
than site-built homes, making them a viable affordable
areas, oftentimes in the form of attached units such as
housing option for low- and moderate-income (LMI)
apartments. Moreover, the Federal Housing Finance
households. Clusters of MFHs form communities on land
Agency, the primary regulator of Fannie Mae and Freddie
parcels. As is the case for site-built SF units for rent or
Mac, restricted those agencies’ financing activities in SF
purchase, rents in MFH communities are affected by land
rental markets in 2018 after determining that it was
shortages.
unnecessary for them to provide liquidity to large investors.
Therefore, the ability to promote SF rental opportunities for
Do Institutional Investors Decrease or
LMI renters may be challenging if institutional investors do
Increase the Supply of SF Units?
not currently rely upon financial support provided by
Critics assert that institutional investors reduce the
federal subsidies or federally regulated institutions. If,
inventory of SF units for purchase by first-time
however, the current trend of rising supply-side costs
homebuyers. As previously discussed, the ability to quickly
persists, institutional investors could decide to incorporate
raise cash for all-cash purchases makes institutional
federal subsidies into their business strategies, which would
investors more attractive to sellers over individuals who
then obligate them to adopt a sharper focus on supporting
need mortgage financing. (For example, even if a buyer
affordable housing policy goals.
making a higher bid chooses a federally guaranteed
mortgage to purchase a distressed property for use as a
Darryl E. Getter, Specialist in Financial Economics
primary residence, the property must still satisfy HUD
IF12225
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Single-Family Market Rents and Institutional Investors

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https://crsreports.congress.gov | IF12225 · VERSION 1 · NEW