(Bloomberg)—Single-family landlords are eyeing opportunities in the slowing US housing market, betting that lower demand from consumers will lead builders to offer discounts.
American Homes 4 Rent, the third-largest single-family landlord, is taking calls daily from a variety of potential sellers, including national builders, Chief Executive Officer David Singelyn said at an industry conference last week. He said builders are currently offering small concessions on deal terms even as they hold the line on price, but he expects that to change.
“We’re going to see those prices come down,” Singelyn said. The landlord is “sitting on a significant amount of investable cash and funds, and we can take advantage of those opportunities.”
The chance for landlords to score deals on new rental homes is shaping up as higher mortgage rates push some would-be buyers to bow out of a frenzied market. Institutional investors discovered single-family rentals a decade ago, in the aftermath of a foreclosure crisis, but few housing observers are predicting a similar crash this time.
Instead, the surge in rates is seen as helping calm the housing mania. Slowing price gains and growing inventory may be good for prospective buyers over the long run. For now, the new conditions are creating risks for homebuilders, who accrue costs when houses take longer to sell. Striking deals with landlords can help builders keep work crews busy and add housing inventory even amid slower consumer demand.
At times, selling houses in bulk to property investors has offered builders better economics than the retail market.
“It’s a buyer looking for an income stream,” Bill Wheat, chief financial officer at DR Horton Inc., said at a UBS Group AG conference. “It’s not a family stretching to qualify for a mortgage for their home. So you can certainly underwrite to a higher valuation on land for single-family rental.”
Even before the recent slowdown, the largest US homebuilders have turned to landlords as a way to diversify their sales efforts. Last year, Lennar Corp. teamed up with Centerbridge Partners and Allianz Real Estate to build and acquire more than $4 billion worth of rentals. PulteGroup Inc., meanwhile, agreed to develop 7,500 houses for rental giant Invitation Homes Inc.
There are some headwinds for landlords, too. Interest rates on single-family rental securitizations tracked by Kroll Bond Rating Agency have increased from roughly 2% through most of 2021 to 5% in one recent deal.
For tenants, wage increases have helped offset rising rents, giving landlords confidence that they can continue to raise prices. Invitation Homes, which has more than 85,000 houses, increased rents about 12% in May from a year earlier. But the average tenant spent about 18% of their household income on rent, lower than the company’s historical average.
Those trends are giving landlords confidence to keep adding homes at a time when builders are looking for new buyers. Local and regional builders have been reaching out to Kinloch Partners CEO Bruce McNeilage, hoping to offload houses as inventory stacks up.
“These are the same builders that over the last few years have not been willing to sell to investors,” he said.
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