SPECIAL SECTION: TRANSFORMATION
SINGLE FAMILY RENTALS
200 180 160 140 120 100
450 400 350 300 250 200 150 100 50 0
Back in 1979, the Federal Reserve raised the discount rate it charged banks to a level that left many of them insolvent. Just two years later, in 1981, Congress deregulated those same banks, enabling them to offer a wider spectrum of financial products, in- cluding variable rate commercial mortgages. The combined impact of these two government actions was to a render the business model of sav- ings and loans unworkable, and b give them a license to “gamble” to make up the shortfall. Many gambled by making risky loans to commercial real estate developers despite having little or no experience in that arena. By the end of the decade, the country faced a savings and loan crisis thanks to that gambling. The music stopped; more than 1,000 savings and loans went under, and $400 billion in distressed assets needed to be packaged and sold. The Resolution Trust Corporation (RTC) was formed to resolve the crisis, and a funding needs, such as seasonal lending pressure that might occur in an agricultural or resort com- munity. When the discount rate rises, the “price” (interest) that banks must pay on these loans rises as well, making it harder for banks to meet financial pressures usually met using Fed loans. The discount rate is the interest charge to commercial banks and other depository institutions on loans they receive from the regional Federal Reserve Bank’s lending facility. Banks borrow money from the Fed to resolve short-term liquidity needs and create flexibility for annual WHATDOES THE "DISCOUNT RATE" MEAN?
2001: End of dot.com bubble
2008: Financial crisis
1993: Look-through provision
1998: Financial crisis. End of REIT boom
1991-1992: Invention of UPREIT Kimco & Taubman IPOs
1996: Start of consolidation
80 60 40 20 0
1986: Tax reform
Stock Market Capitalization - Number of Traded REITs
Market capitalization is the sum of the public stock market value of equity in each REIT in the NAREIT index, where equity value equals price per share times number of shares outstanding.
This chart illustrates how the total asset value of just one form of institutional real estate investment, REITs, rode the wave of this trend.
fire sale soon followed as commercial real estate operators and financial institutions stepped in to capitalize on the opportuni- ty. The modern era of institutional real es- tate investment was ushered in. To further fuel the buying frenzy, the RTC offered very attractive seller-financing to enable buyers to leverage their capital 3:1. The past decade in the housing mar- ket is disturbingly similar in trajecto- ry to the events I just described: Clumsy government action set up the unintended consequence of risky real estate lending, just like in the 1980s. A wave of distressed real estate hit the market, threatened the overall economy and spawned a government-sponsored bailout. Smelling blood in the water, deep pockets converged for the historic opportunity. Early players were first attracted by the short-term appeal of the discounts and fire sales, but many stayed and built long-term businesses. In the 1990s, buyers saw fantastic financing options emerge, including seller-financing from the RTC. This time around, we've already seen some of the lowest-cost financing ever offered to SFR owners.
In the 20 years following the savings and loan crisis, over $1.8 trillion in multifamily asset value was consoli- dated by institutional investors. If the pattern holds, capital will flow into SFR over the next decade on a similar scale. Existing players will expand, and new players will enter. The face of the sector is going to change, particularly given that many of the “new players” in SFR are experienced players in the multifamily sector. Take a look at any “sponsor board” for a major SFR indus- try event in 2019. The commercial real estate industry is showing up for SFR in force. They bring the type of funding that will revolutionize and permanent- ly change the face of this sector. Wise investors will learn to work with them and welcome them with open arms. •
The Looming Rebirth of the Single-Family Rental Industry THE TOPIC OF SFR IS BECOMING A COMMERCIAL CONVERSATION.
by Greg Rand
ore than 1 trillion dollars in U.S. real estate equity is going to be consolidated over the next decade. The single-family rental (SFR) industry, which emerged as an institutional asset 10 years ago, is being reborn as a com- mercial real estate food group now. The apartment industry is adopting single family rentals, and things are about to get really interesting. Can’t see it? Let’s take a look at the path SFR’s more mature cousin, the multifamily rental sector, took more than 25 years ago… M
1989 Savings & Loan Crisis
1979 Federal Reserve raises the discount rate
1989 - 1995 The Resolution Trust Corporation (RTC) liquidates $400 billion in distressed assets
More than 1,000 savings & loan institutions went under thanks to risky lending
1981 Congress deregulates banks
Greg Rand is the founder and CEO of OwnAmerica, a leading provider of acquisition, disposition, and advisory services in the single-family real estate
from those bank losses
market. Learn more at OwnAmerica.com.
34 | think realty magazine :: october 2018
thinkrealty . com | 35
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