The AlphaFlow team recently attended the IMN 5th Annual Single Family Rental Investment Forum at the Loew’s Hotel in Miami Beach, Florida. The team met with some of the top industry experts, discussing the current state of the single family rental investment and lending markets. Throughout the conference, we noted one consistent theme– demand for rental properties has increased across the U.S. When individual developers, financing partners, and take-out investors are all seeing smoke, there’s fire. There are three core elements that are contributing to this major shift: market conditions, demand drivers, and supply suppression.
Let’s dig a little deeper, starting with the understanding of why limited market conditions are impacting single family rental units. Across the United States, we are seeing low saving rates, income stagnation, and an unprecedented rise in student loan debt. With little to no savings, the vast majority of Americans are unable to save up the 20% down payment needed to purchase a home. Renting naturally becomes the next best option. This is a download of the opening day keynote presentation.
On the demand side of the equation, strong job growth and low unemployment are giving Millennials (individuals born between 1982 and 2004) the option to leave their family home sooner. Unlike prior generations, Millennials care more about the proximity to, or availability of, amenities over the size of a house. This group then pushes toward dense urban centers where the price to purchase a first-time home is much more expensive, thus renting is the primary option. Across the nation, we are seeing Millennials migrate for good paying first-time jobs. Areas such as the Pacific Northwest are showing strong signs of economic growth, attracting recent college graduates. Other areas to note include:
- Jackson, MS
- Detroit, MI
- Kansas City, MO
- Oklahoma City, OK
- Dallas, TX
- San Francisco, CA
- Duluth, MN
Supply suppression, caused by low inventory, a minimal number of distressed units, and low national building permits are factors contributing to a squeeze in new single family rental units coming online. Since the 2008 market collapse, very little ground up construction (building a property from an undeveloped parcel of land) has occurred, primarily as a result of tighter lending practices as the industry was still digesting Dodd-Frank and QM (qualified mortgage) policies. Low supply has also been exacerbated as the price to develop new homes has increased. Builders today are hard fought to build for under $200K as costs have increased for local building permits, labor, and raw materials. A great example of this is currently seen in the Dallas market, where a majority of new construction is built in the $300K-$400K range, targeting Millennial first time home buyers.
Fix-and-Flip Market Inventory
As interest rates slowly rise and inventory thins, we are seeing fix-and-flip developers begin to change their approach in selecting properties to buy. Coming out of 2008, developers had a plethora of potential properties to purchase out of foreclosure or from borrowers in duress. In previous years a developer would purchase a property at a discount, complete some light cosmetic rehab and sell the property, netting 25%+ returns. In today’s market, however, finding discounted deals is extremely cumbersome pushing developers to count on their rehab improvements (over the acquisition cost) to net the returns they desire. We are seeing four markets in particular where developers are still able to obtain somewhat of a discount upon purchase: Illinois, New Jersey, New York and Ohio. Since these states operate under Judicial foreclosure ruling, properties foreclosed on years ago are finally coming to market, presenting developers with attractive acquisition deals.
What This Means To AF Loan Acquisition
We see no reason to anticipate any decrease in demand for rentals in the near future. In fact, as interest rates begin to increase and credit starts to tighten, this will only further exacerbate supply constraints as financing options become more expensive. For real estate investors, this market climate presents some interesting investment options. For fix-and-flip developers, this presents another viable exit strategy after the rehab portion of a project is complete.
With more developers counting on their rehab to bolster a property’s exit price, AlphaFlow is reviewing all scopes of work (SOW) with greater scrutiny and making sure the anticipated updates are in line with the surrounding market. Furthermore, we are limiting exposure to novice developers and no longer purchasing loans from first-time developers. Instead, we are selecting loans with more seasoned developers, at a lower yield. Regarding new markets to enter, we will continue to monitor “where” and “how” potential deals are sourced by developers. We will continue to focus on market drivers such as diversity of employment base and millennial migratory habits to help guide our loan acquisition strategy as we believe these are forward leading indicators of market health.
About the author:
Miles Deamer is the Director of Investments at AlphaFlow. He is responsible for the acquisition, underwriting and execution of real estate debt investments. Before AlphaFlow, Miles was one of the earliest employees at LendingHome, helping scale the sales, operations, & servicing teams. Early in his career, Miles was a member of the credit team at First Republic Bank (NYSC:FRC) reporting directly to the Chief of Credit.
Miles received a BS in Real Estate Development from USC where he was a member of a Division I National Championship Water Polo Team.