Wells: Institutional investors have impact on single-family real estate

In my column last month, I set out how builders and Boomers are factoring into our country’s housing supply shortfall.

To recap:

After the fallout of the Great Recession, builders have been hustling to catch up after years of lagging housing starts. Since 2006, we have averaged 1.02 million annual starts per year, compared to a historical average of 1.5 million annual starts since 1959. Now Freddie Mac tells us that we face a housing shortage of some 5 million homes, and this number is supported by a recent NAR research study with the Rosen Consulting Group that concludes that since 2001 we have underbuilt by 5.5 million to 6.8 million homes nationwide. 

While builders are picking up the pace of construction over the past year, the high cost of materials and labor shortages makes it unlikely that we can lean on builders to make up all the housing deficit.

In fact, we need Baby Boomers (those born between 1946-1964) to be a greater contributor in replenishing our housing supply. Boomers own an estimated 40% of the country’s single-family homes, a significant part of which is investment, or rental, property. By incentivizing Boomers to divest some of those holdings, we can go a long way to freeing up inventory for would-be younger buyers.

But there is another influential factor in this supply-and-demand drama that warrants our attention: the institutional investor.

Individual investors, often referred to as “mom-and-pop” investors, currently hold a majority of the U.S. single-family rental stock of 17 million homes. In Northern Colorado, we certainly see a much higher ratio of “mom-and-pop” investors to institutional investors. Nationally, only 2-3% of single-family homes are owned by institutional investors. But as home prices continue to rise across the country and locally, institutional investors are seeing the potential for investment returns in the single-family marketplace.

As of the end of May, the median price for an existing single-family home across the country was $356,600 — up 24.4% year over year. Locally, markets such as Fort Collins, Loveland, and Longmont are seeing similar median price gains (see chart). Not surprisingly, large institutional investors are taking notice, which means they are competing with existing and prospective new homeowners.

We see many established and emerging companies are making instant offers below market value, which provides convenience and efficiency to consumers. But consumers might ask how these companies can make money using this model. After all, isn’t owning a large portfolio of properties risky? 

In fact, these investors see immense opportunity in purchasing at reduced prices. They can hold large pools of rental properties spread across the country in highly desirable markets, or even sell books of properties to emerging SFR (Single-Family Rental) companies. Many developers are even developing entire communities with no plans to sell. They build master-planned communities of single-family detached properties, recognizing that a growing gap of affordability presents opportunities for high occupancies and good long-term fundamentals for value and rental income growth.  

Fundamentally, real estate — and primarily single-family residential — has and continues to be the strongest asset class. As more large institutional investors snap up single-family properties, combined with community limitations on development growth, we see supply-and-demand imbalances being amplified. Rather than focus on the demand side of the equation by incentivizing, policymakers need to address the supply side through capital gains tax incentives for the mom-and-pop investors, or other tax relief to encourage property turnover. Develop smart growth strategies that encourage responsible growth, but don’t stop it dead in its tracks. 

 I would love to hear your thoughts and feedback on how to solve some of the supply side economic challenges. 

Brandon Wells is president of The Group Inc. Real Estate, founded in Fort Collins in 1976 with six locations in Northern Colorado. He can be reached at bwells@thegroupinc.com or 970-430-6463.

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