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» VISIT US ONLINE @ DSNEWS.COM 73 a 60 percent net operating income or better when running at scale. eir successful IPOs, securitizations, and capital recycling is akin to widening the trail they blazed, paving it, and then creating a 10-lane highway upon which capital can flow (and tolls can be collected). Multi-family is a $3.4 trillion-dollar asset class that is 55 percent institution-owned. SFR is a $3.1 trillion-dollar asset class that is 1 percent institution-owned. Do the math. A massive SFR consolidation has begun, and if history repeats itself, $1 trillion will flow down that highway over the next decade or two. THE GOVERNMENT'S ROLE IN SFR It is clear that the federal government was a great enabler in the recovery of commercial real estate in the 1990s, setting in motion the modern era of real estate investment trusts (REITs) by creating that unique tax exemption. e feds are poised to play a similar role today. Earlier this year, Fannie Mae made an astounding announcement that they were backing Invitation Homes' IPO to the tune of $1 billion (I consider the GSEs to be extensions of the federal government). e recognition of rental housing as a critical part of the overall housing market was a breakthrough that is now spreading to Freddie Mac and the Federal Housing Administration. ese organizations, which focus on providing affordable housing by offering low-cost financing, have been unfriendly to investors (and their tenants) for decades. FHA loans were available to investors from 1934 through 1989 when concerns over investor loan performance during the economic downturn caused HUD to take FHA loans away from investors. A HUD report from 2015 recommended that FHA lift the restrictions imposed in 1989 to help create more rental supply for low- and moderate-income families. e report cited the following motivation it suspected had compelled HUD to eliminate investors from FHA single-family loans; "Although there were differences between investor and owner-occupant loan performance, the prevailing understanding among FHA staff and industry representatives interviewed is that investors were eliminated from the 203(b) program for philosophical reasons rather than solely because of performance. e primary driver reportedly was a political conviction that the government should not be supporting individual private investors (although it continues to support investors in multifamily housing)." e proposal to lift the restriction on FHA lending to single-family investors failed in 2015, but now there is a new attitude in Washington about public-private partnership, and the idea is back. e key statement in the excerpt above is in parentheses. HUD does support real estate investors of rental property, but only when it's a multi-family apartment building. It is easy to predict that in this political environment, where eliminating regulations to spur economic activity is the "in" thing to do, this regulation won't last long. I believe HUD, Fannie Mae, and Freddie Mac will all adapt their single-family loan programs to be friendlier to SFR investors. More importantly, HUD will adapt its very popular multi-family loan program to apply to single-family portfolios. at would be a massive tailwind and would speed the consolidation of the SFR asset class by spurring more transaction activity. If the political conviction resurfaces that the government should not be supporting individual private investors, the point will be made that lower cost financing contributes to lower cost rents. If affordable housing is the objective, what's good for the landlord is often good for the tenant. One notable headwind to this momentum in government is the National Association of Realtors (NAR) and their very well- funded lobbying effort. NAR is really the trade association for the homeownership industry, and they've done a fantastic job in that role. Unfortunately, they view investors as competitors to first-time buyers, who are the "little guys" in their world. NAR President William Brown recently wrote that "investors drive up the price of rents and remove affordable inventory from the hands of American homeowners." NAR should get behind the SFR industry, and there are two good reasons why. First, tenants are people too and deserve to live in safe neighborhoods in good school districts. Second, according to NAR's own report, more than 1,000,000 home sales every year are investor purchases. ese are good customers to the NAR members, and they deserve consideration. THE REO INDUSTRY CAN HELP Before there was institutional SFR trying to consolidate massive portfolios of homes, there was institutional REO that succeeded at liquidating massive portfolios of homes. e two share common machinery; they just use them in different directions, like a leaf blower that can become a vacuum by throwing a switch and reversing the turbine. Valuation, preservation, title, legal, brokerage, technology, data, and logistics are essentially the same whether the asset is being disposed of or acquired. Many of the people and companies that played their role in REO are finding that same role is needed in SFR. If the distressed servicing industry were to expand the definition of its market space to include institutional SFR, the universe of possibilities for its participants would expand. A trillion dollars of consolidation lifts many boats. "Earlier this year, Fannie Mae made an astounding announcement that they were backing Invitation Homes' IPO to the tune of $1 billion (I consider the GSEs to be extensions of the federal government). The recognition of rental housing as a critical part of the overall housing market was a breakthrough that is now spreading to Freddie Mac and the Federal Housing Administration." COVER STORY INDUSTRY INSIGHT INDUSTRY INSIGHT INDUSTRY INSIGHT

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