Financing SFR Build-to-Rent in Today’s COVID-19 Climate
- Currently, individual owners dominate the market share of SFRs but mega institutions are gaining an appetite for the asset class.
- SFRs suit millennials, particularly during today’s COVID-19 restrictions.
- Build-to-rent capital stack structures vary depending on who’s involved and who’s investing.
Businesses are moving forward, adopting changes driven by the sustained threats of COVID-19. In an IMN webinar, real estate experts noted although the deals have slowed, interest in single-family rental (SFR), build-to-rent is thriving.
Will SFR Ownership Opportunities Change?
Immediate investors, ready to wire funds, including ultra-high net worth family offices are looking for deals, said Pratik Sharma, the managing director of Bridge Tower Partners. Of the country’s total 21.8 million single-family rentals (SFRs) units, individual investors owned 16.5 million units, about 76%; and limited partnerships owned the next largest share at 14%, according to U.S. Department of Housing and Urban Development and Census Bureau, Rental Housing Finance Survey 2015 data.
“The private equity firms who were active in the SFR space pre-pandemic are chomping at the bit as well,” added Sharma. Private banking platforms and brand names, the reputable firms that can raise $400 million within a week, are seeking opportunities, he said. Plus, although deal flow is slower than normal for the mega institutions, foundations, endowments and pension funds are well aware of SFRs.
Mark Peterson, senior investment officer, SVN|SFR Capital Fund I, L.P., is seeing massive amounts of capital and debt stacking up, and looking to invest in SFRs. In May, Koch Real Estate Investments made a $200 million preferred equity investment in Amherst Holdings’ single-family rental business; and JP Morgan formed a joint venture with American Homes 4 Rent to build 2,500 SFRs.
Strong Market Outlook: Millennials and COVID-19
The COVID-19 crisis continues to force people to spend extended time at home. This has heightened the appeal of less dense, more comfortable living, where social distancing is easier.
Plus, the build-to-rent trend is growing with millennials wanting first homes, where they can raise children. The product has a “stickiness,” with tenants remaining for five and a half years or longer, said Peterson. He reasoned that because the asset class grew out of the Great Recession, it has shown its ability to withstand certain economic hardships.
The majority of Bridge Tower’s tenants are millennials. They’ve been “gut-punched” first by the 2008 recession, and now the COVID-19 downturn, said Sharma. He described Brooklyn Village as one example of property which caters to this demographic of young, working professionals. The 181-unit SFR development offers three- and four-bedroom homes in Forney, Texas, a 30-minute drive from downtown Dallas.
The company focuses on single-family detached properties, which grant more privacy than townhomes. Sharma commented that upon ultimate disposition, these homes will likely achieve a higher premium.
SFR Capital Stack Structures
Pulling together financing for build-to-rent depends on who’s involved in the project, said Sharma. Who is doing the development, construction, property management, and handling the property’s lifecycle? Paying an outsourced homebuilder upfront could require a different financing source, upon which all investors might not agree.
By buying property at the certificate of occupancy stage, SVN’s SFR fund does not assume development or construction risks. Capital stacks will differ based on who is handling different phases and assuming various risks. “Part of the challenge is getting the right parties to fill in the right slots to get the whole thing done,” said Peterson.
Evan Kinne, SVP at George Smith Partners, has observed a tremendous amount of private equity entering the SFR space through institutional channels. They are typically looking for around 55% to 65% bank-financed leverage, he stated. In addition, several banks are providing non-recourse financing. He added that many lenders are seeking approximately a 7% return on costs.
Kinne has seen ample preferred equity as well as debt fund interest. This has included combined senior mezz stretch loans, up to 85% on fairly attractive terms, similar to what’s available for traditional multifamily deals. He predicts that as more SFR projects trade, this will further reinforce the space with lenders.
You can view the full IMN webinar here.