What Does the Increase in Institutional Investors Mean for Future Recessions?

In the wake of the 2008 foreclosure crisis, large institutional buyers backed with Wall Street capital acquired hundreds of thousands of single-family homes, creating a large growth of institutionally owned single-family rentals (SFRs). By 2019, these firms had accumulated a total portfolio of over 200,000 homes worth more than $30 billion. Though the growth of institutional SFRs may have had some benefits, such as reducing vacancies and speeding recovery of the housing market, they also may have had negative effects, such as increased home prices and evictions. To better understand the key trends of the institutional SFR industry and its key players, this study conducts a systematic analysis of the industry, its firms, and strategies.

The authors focus on companies with publicly traded securities, specifically companies structured as real estate investment trusts, and private companies that merged with publicly traded companies. They use data from the US Securities and Exchange Commission, which collects reports on the strategy, management, finances, and potential risks of issuers of publicly traded securities. They use financial and content analysis to better understand both industry trends, such as overall housing inventory and responses to changing market conditions, and organizational trends, including average acquisition price, total investment value, rents charged, vacancy rates, debt outstanding, cash flows, and profit margins, and company strategy. They also collected information from each company’s website on rental listings, which they geocoded and analyzed in comparison with the local housing market.

Key findings

• After the financial crisis, the housing market dislocation helped spur SFR buying.
• Two types of investment companies emerged, one of which raised capital and used their fund structures to grow their SFR businesses, and the second, which includes companies that began purchasing SFRs before the corporate entity.
• The growth of the industry is directly correlated with market conditions. Low prices and the ability to buy homes in bulk through many channels, including foreclosure auctions, short sales, and real estate–owned properties, help speed growth. Acquisition speed slowed in 2015 as housing prices recovered.
• The industry has been consolidated into an increasingly limited number of firms; Invitation Homes and American Homes 4 Rent have emerged as the dominant, publicly traded players in the institutional SFR industry, owning approximately 130,000 SFRs. These firms buy more expensive homes and charge higher rents than other firms.
• Investors choose similar markets to invest in with low housing prices, high population growth, and low housing supply, leading to a concentration of SFR homes in specific cities, particularly within the Sunbelt. Companies aim to have high local density to ensure high demand and low vacancy rates for their units and density appears to reduce the costs of operating property management.
• Many investors have developed extensive, in-house, property management services, though they vary in centralization and standardization across markets. They focus on maintaining high occupancy rates, limiting tenant turnover, and minimizing nonpayment by tenants—which they achieve through rigorous tenant screening focused on credit, income and employment, and background checks and by requiring automatic payments.
• There is major clustering of homes within certain regions, particularly neighborhoods with higher household income and higher rents, and where there is a higher proportion of white households.
• Markets in which these firms have large numbers of homes have higher rental growth rates than the nation overall.

Policy implications

• The rebounding of housing markets after the 2008 recession may pose a challenge for investors and may lead to changes in ownership. If firms decide to exit the market, it will have implications for the housing market, buyers, and current tenants.
• The influx of investors after the recession points to a policy gap, in which a more aggressive state response could have helped support the market and preserve affordability.
• The increasing participation of institutional investors may also create competition for moderately priced single-family housing, as households are unable to compete with well-capitalized firms.