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» VISIT US ONLINE @ DSNEWS.COM 15 15 FLEXIBILITY IS A KEY DRIVER FOR BOOMING SINGLE-FAMILY RENTAL MARKET One of the key drivers of the booming single- family rental market is the desire for flexibility, and it's not just millennials that are choosing to rent a home over buying. e SFR market has not only become an accepted form of institutional investment but also an accepted form of consumer housing, according to Mission Capital Advisors Principal David Tobin. e labor market has improved as the economy has rebounded, and people are moving from the center of the country to the coasts to places that have experienced robust job growth like New York, Florida, and Los Angeles—but they want to be able to move around without being tied down to a mortgage. Some like the ability to move from city to city, while others may be tied to a city but either can't afford a home or can't afford the down payment on a mortgage and would rather live in a detached single-family home than a multifamily establishment. "People really want flexibility with respect to housing so they can focus on careers and not have a mortgage and a house hanging over their head," Tobin said. "e workforce is a lot more mobile now." Not only is flexibility a key when consumers are considering whether to rent or buy, but timing is of utmost importance—and if timing is off, the consumer can find himself in an undesirable situation that he cannot get out of. at is another reason why renting is becoming a more attractive option than buying to many. "Owning a home is the greatest investment that you'll ever make, but it's not such a priority for millennials and even for generation Xers," Tobin said. "If you can time the market, you can make a lot of money owning a home. But if you don't time the market, you can not only lose a lot of money, but you can be stuck in a house or a town or an area of the country where you can't move. So I think what people have known in larger cities all along about renting is now becoming true all around the country, and that is that living in a house is nice, but having somebody else be responsible for the upkeep is even nicer." e fact that the subprime and alt-A lending markets have not come back yet could also be a driver of single-family rental growth, since many consumers who want to own a home are having trouble coming up with the often tens of thousands needed for a down payment on a mortgage loan. "So renting becomes an option if you want to be in a house. Until we have more financing products available to consumers, you're probably going to continue to have a decline in the rate of homeownership," Tobin said. "We've kind of had since, let's say 1980, a 35-year decline in interest rates and a corresponding increase in asset values and home prices. At some point, that's going to change, but who knows? Maybe it doesn't change in our lifetime. at's going to impact housing values negatively." Growth of the SFR market might slow down, but it will likely increase in proportion with the population, Tobin said. If the population grows at the rate of 1 to 2 percent per year, that will calculate to between 3 million and 6 million people. "So there always needs to be a continuation of new housing stock," Tobin said. "It's a great place for foreclosed inventory to go, and I think the other trend that's going to become more pronounced as the big operators cannot purchase foreclosed real estate is consolidating mom and pop owners of rental portfolios through the acquisition in bulk in the markets like Colony and Blackstone are targeting. I think there will also be an emergence of mid-tier operators who specialize in a particular geography or geographies, and they'll be differentiating products." CONFLUENCE OF FACTORS LED TO THE 'PERFECT STORM' FOR SUSTAINED GROWTH IN SFR SPACE A confluence of factors has created the "perfect storm" for sustained growth in the single-family rental market, according to one expert in the Securities Lab at the Inaugural Five Star Institute Single-Family Rental Summit on Monday, October 12, in Las Vegas. ose factors include higher mortgage rates, tightening credit standards, rising home prices, an increased number of rental options, ever-increasing student loan debt, and the number of household formations to building permits combined with declines in income growth, distressed sales, personal savings rate, and the overall desire to earn a home, said Chris Crippen, managing director for US Residential Asset Fund. "is is all leading to the perfect storm for sustained growth," said Crippen, who has worked as an analyst, asset manager, and executive for Wall Street REITs, the FDIC, and Fannie Mae before founding US Residential Asset Fund in 2010. "At the FDIC in 2007 and 2008, the question was 'How long will REOs last?' en all the REO agents went into the investment space. How long will that last? Who knows? We're in an artificially suppressed interest rate environment right now. Trends are good. We're in a perfect storm for sustained growth. I could say for the next five years all looks great and we'll check back then. If I had to put a number on it now, I'd say we're in the third inning. It's not too late to get in." Crippen gave a presentation in the lab on areas of growth in the single-family rental securitization space. e lab also included presentations from Charles Chacko, founding member of OS National (host of the lab); Sonny Weng, lead analyst for the single-family rental sector at Moody's Investor Service. During an 18-month period from 2009 to 2010 while working at the FDIC, Crippen and his team closed 150 banks in the southeast and closed another 23,000 assets. at, Crippen said, opened the door for institutional investors. "is was the beginning of the single-family rental space," Crippen said. "Prior to that, just the cost for an institution to come in and buy a property at market level and try to cash flow it, it just wasn't happening." "is is a $23 trillion market that is just now being institutionalized," Crippen said. "Institutionalization means really intelligent people are coming in here to figure out how they can make as much money as possible. Typically this market was mom and pop investors—5 to 10 homes. ere are about 14 million rentals in the U.S. and about 200,000 are institutionally owned. So there is so much room to grow here." e demand for single-family rental houses has soared, which has caused the boom in the market, Crippen said. "If you look at a multifamily portfolio, they're typically comprised of 1-1s, 2-2s, close to the urban core," Crippen said. "Very few 3-2s. When someone has a kid or has a family and graduates from that and they want to own a home, where do they go? Prior to where we're at now, there was really no place for them." Crippen said the SFR industry is a maturing one where everything consolidates to the cheapest money, and as interest rates start to increase, higher efficiencies will be demanded and created, so there will be even more opportunities and more markets will open up in which renters can participate. "e ways to create efficiencies are policies and procedures and training, and data reporting is a huge thing when it comes to securitization," Crippen said. "As the efficiencies are created, all the experience they've learned in the last four years, it doesn't stay with these institutions. As they get more efficient, it trickles down and teaches other people to be more efficient and make more money in this space."

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