SFR Insider ? Jan 2023 ? Key insights from Roofstock's institutional services team + more

With over $5B in single-family rentals (SFRs) acquired, operated, and sold, Roofstock is a leading platform enabling institutional investors, real estate investment trusts (REITs), builders, and global asset managers to buy, manage, and sell SFR properties and build-to-rent (BTR) communities at scale.

Our institutional team represents buyers and sellers on the largest SFR portfolios in the market and has closed transactions totaling over 7,000 homes in the past 24 months. We prize ongoing collaboration with SFR owners and operators across the industry. We’re always available to discuss current market dynamics and offer our insights, irrespective of your current brokerage needs.

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Key insights from Roofstock’s institutional services team

As we all know, today’s market looks very different than it did just 12 months ago. Rent growth expectations are slowing dramatically, and buyers are suddenly far less willing to overlook a few blemishes in an otherwise solid SFR portfolio offering.????

The sudden change in market sentiment is a reminder to keep our finger on the pulse of market activity throughout the cycle. To that end, our portfolio services team engages with the largest institutional SFR owners on a regular basis to discuss market dynamics and offer advisory services and management opportunities. This keeps us in the loop on how their focus and priorities have evolved during this time of fewer transactions.??

Here are some of the key insights we’ve gleaned from these ongoing conversations:?

Portfolio optimization is the name of the game

Institutional owners are taking a hard look at how they can best position themselves to preserve value and optimize cash flow on existing assets over the next 6 to 12 months while they wait for market conditions to improve. For many, this means culling the bottom 10% to 20% of their portfolios now to enhance performance and respond to evolving buyer preferences. This culling activity sometimes drives opportunistic acquisitions when required by lenders enforcing DSCR/asset replacement provisions.?

Eighteen months ago, a typical seller might have gone to market with a portfolio of 300+ homes knowing that it contained some clearly less desirable assets (e.g., low cap rate/below market rents, poor school districts, higher crime areas) and still expect it to trade at a competitive price. Those days appear to be gone for the time being. Careful and patient buyers are double-clicking into every asset in a portfolio and increasing selectivity to adhere to evolving investment mandates. In response, would-be sellers are wise to clean up any out-of-range variables––including vacancy risks, property management backlogs, below-market rents, and operating expense challenges––well in advance of bringing an offering to market.?Interested to learn how your portfolio stacks up? Get insights from Roofstock’s proprietary portfolio diagnostic platform.

Still no clear sign of distress in the market

While transaction volume has slowed dramatically, we still do not see many obvious signs of distress among existing SFR owners. Portfolios acquired during the most recent cycle likely have a fair amount of equity, have locked in attractive financing, and/or are still in the middle of their lifecycles. Consequently, while sellers know that values may continue to suffer downward pressure well into 2023, there’s a hesitancy to pursue what might have been a planned exit at this time given the current tepid demand. We expect supply to remain depressed for the time being, as most existing owners have demonstrated that they can and will simply weather the storm. One notable caveat, however, comes from the for-sale homebuilding industry. They’re simply not set up to wait out the market, so we’re seeing a marked increase in homebuilders offering incentives and discounts aimed at getting newly finished inventory off their books. It’s clearly not 2009 all over again, and homebuilders have evolved their approach to better understand the needs of SFR buyers (cap rates, cash flow, market rents, willingness to upgrade finishes to attract buyers, etc.).

Buyers aren't necessarily underwriting to market rent

Over the past several years, buyers were more than happy to generously underwrite portfolios that had significant exposure to below-market rents. Buyers previously expected that rents would keep rising and that most leases could be marked to market with limited vacancy risk in just a few quarters. That’s suddenly no longer the case, but plenty of existing portfolios still harbor significant loss-to-lease ratios that are now viewed somewhat more cautiously by potential buyers. As below-market leases roll, owners will certainly see some uplift––especially if the tenant has been in place for multiple years with only minimal rent bumps.?

The difference now is that most buyers are not expecting an additional lift from further improvement in underlying market rents going forward. Many buyers expect only 3% to 5% market rent growth in many U.S. markets during 2023, not the 10% to 20% annual rate we’ve seen since 2020. The market no longer expects rent growth to increase yield performance by 100 bps purely as a result of renewing existing tenants at new higher rents. Lenders are also adjusting their market rent growth expectations, which, when combined with higher interest rates, is seriously impacting the cost and availability of debt financing. Sellers and buyers alike will need to reset expectations accordingly.?

Roofstock's portfolio diagnostic platform

Having a holistic understanding of your current portfolio and creating a strategy that aligns with current market dynamics is more important than ever. Roofstock’s proprietary portfolio diagnostic platform can help you stay ahead of the curve in 2023 and beyond. Our institutional services team uses this proprietary platform to help them identify:?

• Key areas for portfolio optimization?
• Opportunities for improving rental rates?
• Strategies to stay ahead of current market fluctuations?
• Less favorable assets or markets to target for rebalancing

Get in touch with our team for a forward-looking 2023 analysis of your portfolio by emailing [email protected]

Roofstock S3 (Scaled Seller Services) one-off disposition channel

Roofstock has launched the?S3: Scaled Seller Services?program to make selling pools of properties one by one on the MLS both easy and cost-effective:

• Full process execution, from assigned listing to closed transaction?
• Broker recruitment and robust performance management??
• Coordination of property preservation or renovation work?
• Transaction coordination?
• Scalable systems infrastructure and institutional-grade reporting?
• Platform built to manage thousands of MLS dispositions across all major institutional SFR markets?

Interested in learning more? Get in touch with the S3 team at [email protected].