Emerging Challenges for Institutional Landlords

The real estate market is becoming increasingly challenging for those looking to sell properties. A growing supply, escalating mortgage rates, and reduced consumer confidence are deterring potential buyers. Consequently, some homeowners, frustrated by this situation, are choosing to retract their properties from sale and instead offer them as rentals.

These newly available rental homes are now directly challenging established institutional rental investors, especially in regions where these investors are most active.

Major property investors, each owning over 50,000 homes, are predominantly located in specific geographic areas. Companies such as Invitation Homes, American Homes 4 Rent, and Progress Residential manage a significant portion of their assets—over one-third—in just six U.S. cities: Atlanta, Phoenix, Dallas, Houston, Tampa, and Charlotte. Over the past year, these areas have experienced inventory increases exceeding 20%, much of which originates from previous homeowners turning into landlords.

Jesus Leal Trujillo, a principal data scientist at Parcl Labs, notes that sellers unable to secure buyers have three options: they can wait by delisting, reduce their asking price, or become landlords by renting out their properties. This latter route results in what Parcl Labs identifies as 'unintentional landlords,' who enter the rental market out of necessity rather than by choice.

Alternative Strategies

Consider the case of Garret Johnson, who bought his home in Dallas two years ago. Recent job changes prompted him to move to Houston, leading him to attempt selling his home last March.

Johnson observed a lack of serious buyers, noting that many were merely waiting for better mortgage rates amidst economic uncertainties prevalent during March and April, when the home was listed.

Deciding to pivot, Johnson turned his home into a rental property. Within just a few days, he received multiple rental offers, despite it being a less-than-ideal scenario for him.

Though the rental income does not entirely cover his mortgage, Johnson succeeded in lowering his payments by increasing his equity and changing his insurance from a homeowners to a landlord policy, anticipating a potential sale in several years.

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Johnson remains optimistic. "Creativity is key," he asserts, hoping to eventually convert the property into a profit-generating asset, balancing rent against mortgage expenses.

Increasing Home Inventory

Nationwide, the inventory of homes for sale has been on an upward trend, particularly in popular relocation areas during the pandemic, such as the Sun Belt. Sellers, accustomed to steep price escalations over recent years, are slow to adjust prices downwards. The consequent rise in rental supply could restrain landlords' ability to hike rents.

Haendel St. Juste, a senior research analyst at Mizuho Securities, explains, "While rents might not significantly decrease, expectations for 4% or 5% increases may adjust to more modest 1% to 2% rises in some cases." Established landlords such as INVH and AMH continue to experience around 4% to 5% renewal rates with 75% tenant retention—a cornerstone of their business models.

This scenario is not unprecedented. In 2022, when mortgage rates doubled, Rick Sharga, CEO of CJ Patrick Co., observed a surge in secondary property ownership outside primary residences.

Investor Adjustments

Large REITs in the single-family rental market are currently selling more properties than they are acquiring, as indicated by data from Parcl Labs. Yet, this does not signify a withdrawal from the market.

Instead, Rick Sharga notes that these funds are increasingly allocating resources towards build-to-rent projects, avoiding direct competition with smaller investors and traditional buyers, thereby mitigating risks posed by accidental landlords.

Despite these precautions, St. Juste suggests that to achieve optimal revenue without slashing rents, major landlords might have to accept some drop in occupancy levels.

He warns of incremental risks associated with the slow sales season, indicating that a potential influx of supply this fall or the following spring might pose challenges for rental growth projections in the coming year.