Colliers Capital Markets spoke with Shawn Henry, Colliers’ Head of Single-Family Rental, to get his perspective on the single-family rental (SFR) market. Below are takeaways from our conversation.
Colliers Capital Markets (CCM): The amount of capital flowing to the SFR space is astounding. With the single-family housing universe valued in the tens of trillions of dollars, there is plenty of growth potential. What are you seeing on the ground? How are investors approaching today’s market?
Shawn Henry (SH): Institutional investors are paying a premium to indicative pricing from sources like Zillow/MLS. These investors are getting to bid prices by using a combination of trended home price appreciation and reduced closing costs from bulk purchases. At today’s historical 18% annual house price growth rate, they can include an anticipated 1.25% increase in housing sales prices per month, pay 4%–5% above list, and close at market value in three months. They are also using technology to their advantage to find properties and manage assets.
CCM: What are investors looking for?
SH: For the “in the buy box”-type homes, investors will pay a 10%-plus premium above Zillow/MLS prices. They target high-growth metros in the Sun Belt at prices in the $250,000–$450,000 range for suburban assets in average-to-good school districts. They use a hybrid underwrite of yield targets of say 4% and try not to buy too far outside Zillow/MLS value. Workforce housing is in demand at an attractive-entry-price basis, in stable or growing metros and with yields in the range of 6%-plus. Investors are varying their acquisition targets, some seeking higher-priced and luxury homes in some of the most expensive markets in the country and others targeting Housing Choice Voucher strategies.
CCM: How do investors benefit from purchasing a portfolio or a number of properties at one time instead of one-by-one?
SH: It’s very difficult for investors to build a portfolio from scratch today. The housing market is hyper-competitive, with many buyers still offering prices well above ask to “win” a home. Investors take the emotion of home purchasing out of the equation; they cannot operate by outbidding families on a one-off basis dozens, if not hundreds, of times. The ability to buy 12, 25, or 100 houses in one transaction appeals to institutions as either a primary strategy or to augment an individual-asset purchase strategy.
Sellers can also benefit in four major ways: First, sales commissions (seller paid) are significantly less — at 1% to 3% to a professional SFR sales advisor — than in a traditional sale with a co-broker, for perhaps 5%. Second, the efficiencies in bulk title work add up to 40%–50% savings. Third, which is less applicable today in the strong single-family market, is limited execution risk. Fourth, to make houses “home sale”-ready, sellers do not need to move tenants out to make repairs in vacant houses. The net result of these factors could be a “net cash to seller” pickup of 5% to 15% above Zillow estimates/MLS sales. Sellers should be mindful to not sell too cheap because they see a Z estimate on their property.
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