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CoStar: SFR Markets are Shifting to the South and Midwest

Two-Story-HouseCoStar, a research organization, reported that single family rental (SFR) property acquisition is geographically shifting as home prices stabilize and credit conditions ease. Investors have also become more selective in which properties to buy and are more focused on managing their properties, collecting rents, and improving operations.

Morgan Stanley, an investment firm specializing in wealth management, investment banking and sales, and trading services, analyzed a growing trend among institutional SFR operators that are moving away from quickly recovering western markets and heading toward the South and Midwest.

Although still at the low end of its projections, the firm believes that this geographical change may help increase mortgage-backed security (MBS) issuance volume. Morgan Stanley analysts also noted that this type of shift affects property quality and realized home price appreciation.

The SFR market boomed with news of major property acquisition of distressed properties in the early days in places that suffered greatly during the recession. These places included Phoenix, Las Vegas, and Southern California.

“Houses in the West typically were acquired earlier than those in other parts of the country,” the Morgan Stanley analyst reported. “Because of that, those purchases have realized more of the post-recession appreciation. And because home values fell so far in those areas, the magnitude of the recovery in western metropolitan statistical areas was also typically greater. “

With the market moving toward the South and Midwest, operating cost are likely to rise, CoStar reported. This will likely happen because institutional buyers are focusing on South and Midwest deals and if operators continue to report spending more on rehabilitation costs as a percent of total cost on properties in the South and Midwest than they do on houses in the West. This could also mean lower-quality properties and/or older homes in these regions, which could lead to higher ongoing expenses.

Over the past two years, the SFR mortgage-backed securities market for single family rentals has grown rapidly, the CoStar reported. Institutional owners have brought 18 of these transactions to a total market value of $9.8 billion.

However, CoStar notes that portfolio growth has slowed across the eight SFR institutional investors that issue mortgage-backed securities. Nomura estimated that the number of single-family homes owned by these firms increased by 44 percent in 2014, but grew by only 6 percent during the first quarter of 2015.

“Looking ahead, Nomura now expects the pace of issuing mortgage-backed securities to slow considerably through the remainder of the year as the institutional investors move from focusing on acquisitions to improving management of their existing portfolios,” CoStar reported. “Assuming that the firms continue to slow their rate of growth and that 40 percent of the total portfolio is funded through mortgage-backed securities, Nomura estimates that the market may see an additional $2.6 billion in issuance through year-end.”

About Author: Xhevrije West

Xhevrije West is a writer and editor based in Dallas, Texas. She has worked for a number of publications including The Syracuse New Times, Dallas Flow Magazine, and Bellwethr Magazine. She completed her Bachelors at Alcorn State University and went on to complete her Masters at Syracuse University.

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