It's a known and oft-cited fact: Real estate is local. So, real estate's alter-ego is Wall Street, which is local in name only.
The issue is why this matters to home builders. We'll get there.
Earlier this week, Colony American Homes and Starwood Waypoint Residential Trust announced they'd merge their single-family rental empires into one. Now, their combined portfolio of 30,000, valued at around $8 billion, ranks a closer No. 3 to Blackstone's Invitation Homes in the No. 1 spot, and No. 1 American Homes 4 Rent.
The narrative for real estate's alter-ego is that single-family rental is an asset class with legs, whose cash-flow and property management model can generate the kind of earnings yield-ravenous institutional investment players crave. Here's a really thorough analysis in Harvard University's Journal of Real Estate, by Alexander Akel and Toll Brothers' Fred Cooper, on "The Long-term Viability of Institutional Single-Family Rentals."
Over-simply, if it's going to continue to be hard for people to "step up" to homeownership in America, there's terra firma for this business model. After all, a home site doesn't care whether the person living there owns it or rents from the owner; it's still generating economic value.
In the context of a robust mergers and acquisitions environment leading toward sector consolidation, both at large and in residential and commercial real estate and building products, the merger:
- Buys scale
- Offers opportunity for cost-saving efficiencies
- Mitigates risk
- Will become increasingly manageable as technologies and operational processes improve
- Affirms the operating business model, backed by institutional investment
For players in "real" real estate--builders, single- and multi-family developers, and replacement contractors--the Colony American/Starwood Waypoint deal has other implications.
Let's look at a few of them.
First a macro perspective, because mainstream business press headline writers are always going to infer that a sustainable business model for institutional investment-backed single-family rental business must amount to a dire threat to either single-family for-sale builders and developers, or to more traditional multifamily rental players. This is hog-wash.
It may seem to be the case if one's looking only at percentages. There's sturm und drang when many housing observers ponder homeownership rates falling to the low 60s as a percentage of households. But that's not necessarily the end of the world for for-sale builders if you look at the absolute numbers of households increasing.
Demographic outlooks in the U.S. over the next half century suggest that there will be plenty of business for all, whether it's single family for-sale or for-rent, or multi-family for-sale or for-rent. The only tough part of it is that growth in overall households mean that faster success will be offset by faster failures. A rising tide will lift some ships and swamp others.
So, taking away the "threat" aspect, I think what we're left with is a single big question for home builders, and it's a tough one.
Is your business about selling "the American Dream" in the classic sense of homeownership?
Most people and companies who are selling products and or services have had to become acutely aware of how what they're really selling are solutions and the attainment of goals for people.
Many of the builders I talk to are particularly gratified that among the solutions and goals they're part of helping people attain is this classic American Dream of homeownership.
But that notion, whether it was ever more than a aspirational myth or an actual attainable financial and lifestyle goal, assumed stability in a few areas that are now passe ... like traditional family composition; like geographical permanence; like house valuations always on the rise.
Our culture and society have morphed. Stability in those few areas has now been replaced by dynamism and fluidity and change.
So, for home builders, the big question is this. Single-family for-rent as an institutional investment asset class may have legs, but it's statistically a pimple on the ocean in housing. The Harvard Journal of Real Estate piece notes that while single-family rental comprises 14 million homes and growing, the institutional investor owned share of them is just 1.2%.
That said, and if we go back to the initial truism that real estate is local, new home builders must consider whether they profitably can become part of what people will probably need. Single-family homes for rent in communities with the programming and amenitization and connectivity that looks and feels like homeownership.
A lot is agnostic when it comes to whether the resident owns it or some Wall Street investment block does.
A few dozen builders whose core skill-set is selling new construction to individuals in pursuit of the American Dream are trying to get their business model minds around single-family rental.
So should you.