Commercial Real Estate Finance

Last month, Llenrock‘s Andrew Benioff chaired a panel discussing the benefits and risks of family home aggregation, a strategy gaining prominence in today’s depressed single-family market. The session was part of IMN‘s U.S. Real Estate Opportunity & Private Investment Forum, a two-day conference in New York City.

Single-family aggregation strategies are gaining traction in the U.S. because of the continuing austerity of the post-bubble housing market. There’s plenty of supply, of course, and lots of people who want to own homes. But the ongoing uncertainty over Fannie and Freddie, along with high unemployment and more restrained lending practices, are keeping the American dream of home ownership unrealistic for many. 

As you can see above, the decline in both average and median home prices since the 2007 peak has struck a significant blow to this enormous segment of the real estate industry (and the economy as a whole). Given the challenging fundamentals in this sector, many are taking on the aggregate housing approach, merging residential and commercial real estate:

If you can’t sell it, rent it.

As long as potential tenants are strapped for cash, and monthly rents are lower than monthly mortgage payments, the huge inventory of single family homes constructed up to 2008 remain viable assets, provided someone is willing to buy and operate these properties.

Of course, it’s more complicated than that. As the members of the IMN panel discussed, some issues potential investors must consider are:

• How to finance these large acquisitions
• Portfolios versus individual properties
• Establishing investment criteria: number of properties, region, and so on
• Joint ventures and criteria for local partners
• When to rent, when to sell

Naturally, these decisions will vary according to region, investor, funding, and macroeconomics.  One consideration I would add to the above list, something that applies to all areas of investment, is this: time.

Increased activity in the single family market may give the housing market a bit of a bump. This is a good thing for housing, but not for the firms and funds looking for cheap assets, which are what make this strategy appealing in the first place.

Single-family aggregation is picking up. Last week, CoStar reported that Alaska Permanent Fund Corp. (that’s right, Alaska!) is prepared to commit $400 million to acquire single-family properties in the lower 48 (apparently, Alaska real estate isn’t so hot right now). (Sorry).

The fund’s chairman, Bill Moran, says,

The reported shift in consumer interest from owning homes to renting, combined with the surplus of single-family homes in many markets has created this unique opportunity (CoStar)

Depending where the fund and its affiliate, American Homes 4 Rent, deploy this capital, such an investment could provide both near-term rental income and long-term profits if sold off when (if?) the housing market improves. It seems like a safe strategy, one that allows some down-the-road flexibility. Ultimately, though, the success of such a venture will depend on which houses and markets the fund focuses on.

One Response to “If You Can’t Sell It, Rent It”