Institutional Investors: A Local Perspective

Institutional Investors: A Local Perspective

Highlights

• Cash sales have become more prevalent in low-income ZIP Codes.
• Between 2017 and 2021, home prices have appreciated rapidly in ZIP Codes with a large investor presence. Conversely, income growth in these ZIP Codes has been modest.
• Some localities are starting to implement restrictions on institutional investment.

Home purchases by investors have garnered national attention as the inventory of homes for sale nationwide decreased precipitously from 2020 through the first quarter of 2022, the result of strong demand fueled by historically low mortgage interest rates. Commanding further attention was the emergence of bidding wars for homes between traditional homebuyers (including first-time and move-up buyers) and investors of all sizes, including iBuyers.¹ As the percentage of investor purchases increased, average home sales prices skyrocketed, making homeownership more expensive.

Investors typically have a competitive advantage over households because of their access and ability to pay in cash. Investors are also attracted to properties in various stages of disrepair. According to research from Laurie Goodwin and Edwin Golding, “most of the homes institutional investors buy need repair. And because of operational and financing advantages, these institutional investors can repair these properties more quickly and efficiently than an owner-occupant generally can.”² Investors often have access to a line of credit, which allows them to expedite their transactions. Although investors may use a line of credit or some other financing mechanism, these transactions ultimately are recorded as cash sales. Because data on investor home sales are limited, cash home sales serve as a measure of investor activity. According to CoreLogic and the National Association of REALTORS^®, during the first quarter of 2022, investors were responsible for approximately 60 percent of cash home sales nationwide.

Since 2017, investor purchases have been most prevalent in the Sun Belt. Of HUD’s 10 Regions, Regions IV and VI recorded the most home sales transactions during the past year and had the highest number of cash home sales. Florida accounted for 37 percent of the 1.97 million home sales transactions in Region IV during the 12 months ending June 2022, of which 320,400 were in cash. Texas accounted for 72 percent of the 1.10 million home sales transactions in Region VI during the 12 months ending June 2022, of which 292,300 were in cash.

Types of Investors

To understand the effect of investors on home sales markets, researchers need to know the size, location, and composition of the purchases within their portfolios. Investors are categorized as small, medium, large, or institutional based on the number of units they own. In addition, the location of investors’ purchases offers valuable insight into potential imbalances between the supply and demand for housing. Investor purchases can include several types of real estate, but for the purposes of this article, we focused on data from John Burns Real Estate Consulting that include only single-family detached homes.

Investors with portfolios containing one to nine units generally are considered small investors and typically consist of mom-and-pop investors: individuals who own and operate properties either through traditional leases or through popular platforms such as Airbnb and Vrbo. As of August 2022, single-family rental properties within small investor portfolios accounted for 80 percent of investor-owned homes nationwide. The percentage of small investorowned homes exceeded the national level in several metropolitan areas throughout the Sun Belt, including Albuquerque and Myrtle Beach, at 88 and 90 percent, respectively, where home sales prices were well below the national average.

Medium investors, defined as investors with portfolios containing 10 to 99 units, held the second-highest share of investor-owned homes at the national level during August 2022, at 14 percent. The percentage of homes owned by medium investors exceeded the national level in Kentucky’s largest metropolitan areas. In Lexington, medium investors accounted for 25 percent of investor-owned homes. Similarly, in Louisville, medium investors accounted for 23 percent of investor-owned homes. Investors in Kentucky were attracted to the state’s lower-priced homes. The average home sales prices in the Lexington-Fayette and Louisville-Jefferson County metropolitan statistical areas (MSAs) were $280,400 and $260,900, respectively, during the 12 months ending July 2022, which was substantially lower than the national average home price of $401,900 during the same period.³

Investors with portfolios containing 100 to 999 units are defined as large investors. As of August 2022, single-family rental properties within large portfolios accounted for 3 percent of investor-owned homes nationwide. The share of large portfolios in the Sun Belt generally mirrors the national share, although the major metropolitan areas of Oklahoma City and Tulsa in Oklahoma recorded market shares of 8 percent and 7 percent, respectively. Large investor purchases in these markets were attributable in part to the much larger share of single-family homes in their rental inventory. Single-family renter households account for an estimated 32 percent of the rental market at the national level.⁴ By comparison, single-family renter households in Oklahoma City and Tulsa account for an estimated 48 percent and 43 percent of the rental market, respectively.

Institutional investors, defined as investors with portfolios containing more than 1,000 units, are nonindividual investors and can include limited liability corporations, limited liability partnerships, real estate investment trusts, and other entities.⁵ As of August 2022, single-family rental properties within institutional portfolios accounted for 3 percent of investor-owned homes nationwide. Institutional investor portfolios remained relatively small by market share as of August 2022, but several notable exceptions exist. Shares of single-family rental homes owned by institutional investors in Atlanta, Georgia; Charlotte, North Carolina; and Jacksonville, Florida, in HUD Region IV were 21 percent, 16 percent, and 16 percent, respectively. Similarly, in HUD Region VI, Fort Worth, Dallas, and Houston recorded institutional investor-owned rates of 10 percent, 8 percent, and 8 percent, respectively. Among the markets exceeding the national average for institutional investment, all had a gross rental yield exceeding 7 percent.⁶ At this rate of return, institutional investors can cover their costs and turn a profit despite rising inflation. Unlike other rental assets, which typically have longer lease terms, single-family rentals owned and operated by institutional investors are frequently offered with short-term leases that are more adaptable to rising costs.

Why Institutional Investors Are Buying Existing Single-Family Homes

Since the onset of the COVID-19 pandemic, institutional investors have significantly accelerated their purchases of existing single-family homes. Although institutional investors make up only a small share of the housing market, their purchases have significantly influenced local housing markets across the country. Moreover, the rising costs of purchasing developable land, acquiring construction materials and labor, and navigating regulations have hindered overall housing development in recent years. Minimum lot sizes, parking restrictions, and fees, along with zoning ordinances, have made infill development prohibitively difficult, effectively limiting multifamily construction in many cities nationwide.⁷ As developable land in high-demand areas has become scarcer, construction costs have increased.⁸ The resulting rapid rise in home prices and rents has attracted institutional investors, who view housing as a good asset with which to diversify their portfolios. Rising home prices mean that the asset is appreciating, whereas rising rents lead to income gains from that asset, which is extremely attractive to investors.

Determining Factors for Institutional Investment

Although the market for single-family rental housing demonstrated less volatility than did the market for apartments during the COVID-19. pandemic,⁹ trends in apartment vacancy rates and rents offer institutional investors important insights into potential rental demand within a market. Median price-to-rent ratios (the median home value divided by the median annual rent) also illuminate homebuying and rental investment decisions. Real estate investment decisions often employ price-to-rent ratios to identify areas that are ideal for owning rental property and determine how appealing a location might be for rental property investments. Price-to-rent ratios, housing appreciation, and home prices all factor into an institutional investor’s decision to enter a market.

U.S. Sun Belt and HUD Regions 4 and 6

Along with market-specific indicators, demographic fundamentals influence real estate investment decisions. An increasing number of Americans are forming households, including younger age cohorts aging into household formation.¹⁰ Strong population growth, particularly among people aged 34 to 44, is likely to fuel near-term demand for rental housing, with high home prices and mortgage rates. Markets with limited institutional investment activity tend to have slower population growth among key age cohorts associated with future demand. In the Chattanooga, Tennessee-Georgia MSA, overall population growth from 2010 to 2021 resulted primarily from an increase in the portion of the population at or near retirement age, generally defined as residents aged 60 and older. This age cohort increased annually by an average of 3,200, or 2.6 percent, during the period.¹¹ From 2010 to 2021, the number of residents under the age of 18 was virtually unchanged, declining by an average of approximately 40 annually. Similarly, during the same period in the Albuquerque, New Mexico MSA, the number of residents under the age of 18 declined annually by an average of approximately 1,900, or 0.9 percent. Residents aged 18 to 44 increased just 290, or 0.1 percent, annually during this period. Conversely, in the Charlotte, North Carolina-South Carolina MSA, where the number of single-family rentals owned by institutional investors is estimated at 26,900 units, or 16 percent of the single-family for rent market,¹² the population of residents aged 18 to 44 increased by an average of 36,950, or 3.4 percent, annually throughout the period.¹³

Many markets have unique structures that also affect institutional real estate investment decisions. In the Myrtle Beach-Conway-North Myrtle Beach, South Carolina-North Carolina MSA, an estimated 77.2 percent of the existing occupied housing is owner occupied.¹⁴ Many of the homes for sale in the area are vacation and investment homes. Some of the most common investment properties in the city of Myrtle Beach are one-bedroom oceanfront condominiums and small vacation rentals near the beach, because one- and two-bedroom condominiums currently dominate the housing market. Many of these units are in investment condominium hotels, or “condo-tels,” which are multifamily structures that often regulate the maximum number of units that a single purchaser can own. Furthermore, many of these existing structures already have onsite management services for a larger fee, often between 35 to 45 percent of rent collected, which reduces the potential rate of return for large-scale investors.¹⁵ In addition, most condominium hotels require high homeowners association dues in addition to management services and taxes.

Characteristics of Communities With the Largest Number of Institutional Purchases

Because of its strong population growth, Texas is a hotspot for investor purchases. According to a 2021 report from the National Association of REALTORS^®, 28 percent of Texas home purchases were made by institutional investors, the highest percentage in the nation.¹⁶ The same report states that areas that attract institutional investors to a market include those where the number of households grew more than 11 percent during the past decade, renters make up 30 percent or more of local households, 12 percent of residents moved within the past year, rents increased more than 30 percent during the past decade, and home prices rose more than 40 percent in the past decade. The Dallas-Fort Worth-Arlington MSA meets those criteria; it also serves as an interesting case study, because the MSA is broken into two separate metropolitan divisions.

Case Study: Dallas/Fort Worth

Between 2010 and 2020, the population and the number of households in the Dallas-Fort Worth-Arlington MSA increased by nearly 20 percent. With such strong population growth, home price and rent increases during the past decade were well above the respective 30 and 40 percent thresholds that make an area attractive to institutional investors. The Dallas-Fort Worth-Arlington MSA consists of two metropolitan divisions: Dallas-Plano-Irving and Fort Worth-Arlington. The Dallas-Plano-Irving metropolitan division is the larger of the two, with a population of more than 5.1 million and more than 1.8 million households as of the 2020 decennial census; the Fort Worth-Arlington metropolitan division had a population of 2.5 million and slightly more than 900,000 households during the same period. According to data from John Burns Real Estate Consulting, as of August 2022, institutional investors owned more than 15,800 single-family rental properties in the Dallas-Plano-Irving metropolitan division and more than 13,750 in the Fort Worth-Arlington metropolitan division. These investors are buying a larger share of homes in the Fort Worth-Arlington metropolitan division (1.4 percent of all housing units) than in the Dallas-Plano-Irving metropolitan division (approximately 0.8 percent of all housing units).

This case study incorporates data on cash home sales at the ZIP Code level to highlight the reasons why investor activity since 2017 has grown more rapidly in the Fort Worth-Arlington metropolitan division than in the much larger Dallas-Plano-Irving metropolitan division. In each of the metropolitan divisions, the highest percentage of cash home sales occurred in the principal county. In the Dallas-Plano-Irving metropolitan division, Dallas County is the largest county, with a population of more than 2.6 million. Tarrant County, with a population of more than 2.1 million, is the largest county in the Fort Worth-Arlington metropolitan division.¹⁷ Between 2010 and 2020, Dallas County’s population increased by an average of 24,500 annually, or 1.0 percent, whereas Tarrant County’s population increased by an average of 30,100 annually, or 1.6 percent. The faster population growth rate of Tarrant County is one factor making it a more attractive location for institutional investors.

Sharp increases in home prices and rents during the past decade made the Dallas-Fort Worth-Arlington MSA attractive to institutional investors.

As of the 2020 decennial census, Tarrant County had 760,700 households, an average annual increase of 10,400, or 1.5 percent, since 2010, whereas the number of households in Dallas County increased by an average of 11,000 annually, or 1.2 percent, during the same period. Although Dallas County gained more households between 2010 and 2020, Tarrant County gained households at a faster pace. Investors also consider the components of change, including the area’s average household size, when buying a single-family home to rent. Between 2010 and 2020, the average size of a newly formed household in Tarrant County was 2.89 people, whereas in Dallas County the average household size was just 2.22 people. Single-person households made up 15.7 percent of all households in Dallas County but just 11.7 percent of households in Tarrant County.¹⁸ Also, 34.8 percent of households in Tarrant County included a child under the age of 18 compared with just 32.0 percent of households in Dallas County.¹⁹ For investors in single-family rental properties, areas with a greater share of larger households with children would be more attractive than areas with a higher share of single-person households, which tend to gravitate toward smaller apartment units. Tarrant County not only has a greater share of larger households than Dallas County but also a higher percentage of single-family homes. Single-family homes made up 67 percent of all housing units in Tarrant County compared with 53 percent of all housing units in Dallas County.

Financial considerations also influence investors’ decisions, leading to more investment in Tarrant County than in Dallas County during the past 5 years. Ideally, investors want not only a steady stream of rental income but also an asset that holds its value. From 2017 to 2021, the average sales price of a home in Tarrant County increased by an average of $19,150 annually, or 7 percent, compared with an annual increase of $13,000, or 4 percent, in Dallas County.²⁰ Taxes are an important consideration for the investor as well, especially in Texas, whose property tax rate is among the nation’s highest. Tarrant County’s tax rate was approximately $0.5836 per $100 of assessed value,²¹ which is lower than the Dallas County rate of approximately $0.6165 per $100 of assessed value.²² This difference, while not large, can affect the return on an investment, particularly for large investors making multiple purchases.

According to data from CoreLogic, cash home sales accounted for 31.4 percent of all home sales in Tarrant County in 2017, but by 2021, cash home sales accounted for 39.7 percent of all home sales in the county. The rate of growth in cash home sales in Tarrant County was much faster than that of Dallas County during the same period. Cash home sales in Dallas County accounted for 37.1 percent of all home sales in 2017 but just 39.6 percent of all home sales in 2021.

Analyzing the ZIP Code areas with the highest and lowest percentages of cash home sales yields additional insights. During 2017, the three ZIP Codes with the highest percentage of cash home sales in Dallas County were 75210, 75215, and 75216 (hereafter, the high Dallas group). The high Dallas group consists of contiguous ZIP Codes located in the city of Dallas, just south of downtown and Interstate 30. Within these ZIP Codes, according to 2020 American Community Survey 5-year data, minorities account for more than 90 percent of the population.²³ The three ZIP Codes in Tarrant County with the highest level of investor home sales in 2017 were 76104, 76105, and 76106 (hereafter, the high Tarrant group).

Cash Home Sales in Tarrant and Dallas Counties: 2017

Although the high Tarrant group’s ZIP Codes are sequential, they are not contiguous. The 76106 ZIP Code is northwest of downtown Fort Worth, and the other two ZIP Codes are south of downtown Fort Worth. Like the high Dallas group, the high Tarrant group is home to a large population of minority residents; more than 80 percent of all residents belong to a minority group. In both groups, a significant percentage of the housing stock is older. According to 2020 American Community Survey 5-year data, more than 77 percent of all housing units in the high Dallas group were built before 1980 compared with slightly more than 68 percent in the high Tarrant group.²⁴ These older homes are more likely to transition from owner occupancy to renter occupancy. According to 2016 American Community Survey 5-year data, both the high Dallas group and the high Tarrant group had homeownership rates of less than 50 percent,²⁵ and in 2017, the average home sales price in these groups was less than 50 percent of the average home sales price in the county overall.²⁶

During 2017, cash home sales accounted for 68.9 percent of all home sales in the high Dallas group, with an average home sales price of $119,300, nearly 58 percent lower than the Dallas County average of $283,100.²⁷ By 2021, cash home sales had declined to 57.3 percent of all home sales, whereas the average home sales price in this area rose to $212,500, an average annual increase of $23,300, or 15.5 percent. In 2021, the average home sales price in the high Dallas group was approximately 40 percent lower than the average home sales price in Dallas County as a whole. According to 2016 American Community Survey 5-year data, the average household income in the high Dallas group was $43,996,²⁸ nearly 44 percent lower than the average household income in the Dallas-Fort Worth-Arlington MSA. According to the 2020 American Community Survey, the average household income in the high Dallas group rose to $48,575,²⁹ an increase of 2.5 percent annually. Income growth during this period was already well below the rate of increase in average home sales prices in these ZIP Codes. Income growth also fell short of the rate of rent growth in these ZIP Codes, where rents increased by an average of $42 annually, or 4.4 percent, from 2017 to 2021.³⁰ During these years, the costs associated with both homeownership and renting required a larger share of income in these ZIP Codes, with homeownership costs increasing at a faster rate. The increase in costs contributed to a declining homeownership rate in these ZIP Codes. According to 2016 American Community Survey 5-year data, the homeownership rate in these ZIP Codes was 46.1 percent,³¹ which dropped to 44.7 percent according to 2020 American Community Survey 5-year data.³²

Cash Home Sales in Tarrant and Dallas Counties: 2021

Similar patterns occurred in the high Tarrant group; the early arrival of investors in these ZIP Codes contributed to more rapid growth in home prices than in the county as a whole, and increases in the average home sales price outpaced income growth, which contributed to a decline in the county’s homeownership rate. In 2017, cash home sales accounted for 68.2 percent of all home sales in the high Tarrant group with an average home sales price of $121,600, which was more than 50 percent lower than the average home sales price of $245,500 in Tarrant County as a whole.³³ By 2021, cash home sales had declined to 52.1 percent of all home sales in the high Tarrant group, and the average home sales price for this group rose to $203,600, an average annual increase of $20,500, or 13.8 percent. The average home sales price during 2021 in the high Tarrant group was approximately 36 percent lower than the $322,100 average home sales price in Tarrant County as a whole. Incomes in the high Tarrant group increased at a much faster rate than that of the high Dallas group. According to 2016 American Community Survey 5-year data, the average annual household income in the high Tarrant group was $38,768,³⁴ nearly 50 percent lower than the MSA’s average household income. According to 2020 American Community Survey 5-year data, the average annual household income in these ZIP Codes increased to $51,566,³⁵ an average gain of 7.4 percent annually. Income growth during this period was less than the rate of increase in the average home sales price of a home in the high Tarrant group but greater than the rate of rent growth, which increased annually by an average of $37, or 2.9 percent, from 2017 to 2021.³⁶ During these years, the costs associated with homeownership required a larger share of income from high Tarrant group residents and contributed to a declining homeownership rate. According to American Community Survey 5-year data, the homeownership rate in the high Tarrant group fell from 49.7 percent in 2016³⁷ to 47.2 percent in 2020.³⁸

In 2017, the three ZIP Codes with the lowest percentage of cash home sales in Dallas County were 75019, 75048, and 75063 (hereafter, the low Dallas group). The 75019 and 75063 ZIP Codes are adjacent, located just northeast of Dallas/Fort Worth International Airport, and include parts of the cities of Coppell and Irving. The 75048 ZIP Code is in northeastern Dallas County and includes the city of Sachse. The three ZIP Codes with the lowest percentage of cash home sales in 2017 in Tarrant County were 75054, 76052, and 76177 (hereafter, the low Tarrant group). According to 2020 American Community Survey 5-year data, the minority population was less than 20 percent in the low Dallas group and approximately 35 percent in the low Tarrant group, both of which were significantly less than the minority population in the high Tarrant and high Dallas groups.³⁹ The 76052 and 76177 ZIP Codes are adjacent to each other in northern Tarrant County, situated along the Interstate 35W corridor and west around the city of Haslet. The 75054 ZIP Code is in far southeastern Tarrant County in the city of Grand Prairie, on a peninsula in Joe Pool Lake. Both the low Dallas and low Tarrant groups are areas in which the average annual household income in 2017 exceeded $100,000. The low Tarrant and low Dallas groups both had average home sales prices in 2017 that were above the county’s average home sales price. From 2017 to 2021, the rate of growth in home sales prices in the low Tarrant and low Dallas groups was well below that of the high Tarrant and high Dallas groups. In addition, the homeownership rate in the low Dallas group increased from 60.0 percent in 2016 to 60.7 percent in 2020, and in the low Tarrant group, the homeownership rate rose from 77.4 percent to 81.7 percent. The housing stock in the low Tarrant and low Dallas groups is considerably newer, with just 6.8 percent and 5.1 percent of the housing units in the low Dallas group and low Tarrant group, respectively, built before 1980.

Median Household Income in Tarrant and Dallas Counties: 2016–2020

In both Dallas and Tarrant counties, cash home sales tend to account for a higher percentage of overall home sales in ZIP Codes where home prices are less than the average home price in the county overall and where the average household income is well below the average household income for the metropolitan division as a whole. One of the implications of these findings is that, because so many cash home sales are in lower-income neighborhoods, homeownership becomes even further out of reach for people on the lower end of the income spectrum. In 2017, cash home sales in Dallas County accounted for more than one-third of all home sales in 53 out of the 77 ZIP Codes surveyed, but as of 2021, cash home sales accounted for more than one-third of all home sales in 64 of these ZIP Codes.⁴⁰ According to 2016 American Community Survey 5-year data, 51 ZIP Codes in Dallas County had a median household income that was below the median household income for the MSA overall,⁴¹ and of these, 48 had cash home sales constituting more than one-third of all home sales. In Dallas County, 26 surveyed ZIP Codes had a median household income higher than the MSA’s overall median income, of which only 14 had cash home sales accounting for more than one-third of all home sales. In six ZIP Codes in Dallas County, cash home sales accounted for more than 50 percent of home sales in 2021, and the median household income in all of those ZIP Codes was less than $45,000. A similar pattern exists in Tarrant County, where, out of 62 ZIP Codes surveyed, cash home sales accounted for one-third or more of all home sales in 31 ZIP Codes in 2017 but rose to 55 ZIP Codes in 2021. According to 2020 American Community Survey 5-year data, 33 ZIP Codes in Tarrant County had a median household income that fell below the median household income for the MSA as a whole.⁴² Of these 33 ZIP Codes, 32 had cash home sales accounting for more than one-third of all home sales in 2021. Twenty-nine surveyed ZIP Codes had a median household income that was higher than the median income in the MSA as a whole in 2020, of which 21 had cash home sales constituting more than one-third of all home sales in 2021. In eight Tarrant County ZIP Codes, cash home sales accounted for more than 50 percent of home sales in 2021, and the median annual household income in five of those ZIP Codes was less than $45,000 in 2020. Of the other three ZIP Codes in which cash home sales made up more than 50 percent of home sales in 2021, two had a median annual household income that was higher than that of the MSA as a whole, but the difference was less than $1,000.

Impact on Other Rental Stock

New apartment unit construction was more active in the low Dallas and low Tarrant groups than in the high Dallas and high Tarrant groups. In the Tarrant County group, nearly 4,625 apartment units were constructed between 2017 and 2021, and in the Dallas County group, approximately 2,825 apartment units were built during the same period. Apartment building activity was more prevalent in the Tarrant County ZIP Codes than in the Dallas County ZIP Codes, partly because land costs were lower in Tarrant County. Most new apartment construction in these ZIP Code groups were in areas with low rates of cash home sales. Since 2017, 435 apartment units have been constructed in the high Tarrant group, and just 230 units have been constructed in the high Dallas group. Although all four ZIP Code groups experienced rising rents, they rose fastest in the high Dallas group, which, with only 230 new units built, saw rents increase at a rate of 6.6 percent annually.⁴³ The high Dallas and high Tarrant groups had higher rates of rent growth than did the low Dallas and low Tarrant groups.

Single-Family Homes Within Master Planned Communities: Build for Rent

Although investors have traditionally purchased primarily existing homes, this pattern has recently changed, with developers and builders either selling their inventory in bulk directly to investors or working with investors to build new inventory. One example of the latter is the Amber Pines at Fosters Ridge subdivision in Conroe, Texas. Real estate investment firm Fundrise purchased all 124 homes in this subdivision from homebuilder D.R. Horton in an all-cash transaction with the intent to rent. Although single-family rentals have long been a part of the rental housing inventory as aging homes transition from owner occupied to renter occupied, the build-for-rent model is a relatively new and increasingly popular concept. As the name implies, build-for-rent projects involve single-family housing units that are built for renter occupancy. According to a 2022 article from RentCafé, the number of new single-family homes built specifically as rentals is expected to reach an all-time high of 13,900 in 2022, up from the previous record of 6,740 in 2021.⁴⁴ Texas, with several fast-growing metropolitan areas, is a prime location for new build-for-rent subdivisions.

Case Study: Houston

The Houston-The Woodlands-Sugar Land MSA (Houston MSA) was among the first metropolitan areas in Texas to adopt the build-for-rent movement. Since 2018, 14 subdivisions consisting of 2,575 single-family homes in the Houston MSA have been built-for-rent.⁴⁵ According to data from ALN Apartment Data, the average rent at these properties is $2,279, which is above the average market-rate rent of $1,901 for apartment units built since 2018. Although the average rent for the build-for-rent properties may be higher than market-rate properties, the average rent per square foot is lower: $1.34 per square foot for the build-to-rent properties compared with $1.99 per square foot for apartment units in the Houston MSA as a whole. The larger square footage appeals to young professionals just starting families who want the amenities of single-family living but cannot afford the upfront costs associated with homeownership. Unlike the cash home sales of existing homes, which tend to be concentrated more heavily in the central counties of metropolitan areas, build-for-rent properties tend to be constructed in lower-cost suburban areas. Of the 14 current build-for-rent subdivisions in the Houston MSA, only 4 are located in Harris County, the MSA’s principal county, and none of the build-for-rent subdivisions in Harris County are located inside of the Sam Houston Tollway/Beltway 8. Harris County, which encompasses 1,778 square miles and is larger than the state of Rhode Island, still has large swaths of developable land. In the Houston MSA, 17 build-for-rent developments consisting of 3,290 homes are currently under construction, which will more than double the current inventory of this type of product. In addition, 8 projects consisting of 1,500 build-for-rent homes are planned for the Houston MSA.

Build-for-Rent Properties in Houston-The Woodlands-Sugar Land MSA: 2022

Markets With Limited Institutional Investor Activity

Single-family home investment and growth in single-family homes for rent has been driven by increasing and anticipated levels of rental demand nationwide. Much of this growth depends on local economic factors that affect overall demand in certain markets and at certain price points. In markets where institutional investors represent less than 1 percent of the market share for single-family rentals, barriers exist that have capped the segment’s growth. Recently, Blackstone-owned Home Partners of America announced that it will stop purchasing single-family homes in 38 cities as of October 1, 2022, stating that it “assessed several factors such as home price appreciation, state and local regulations and market demand.”⁴⁶ Cities included in the announced pullout were Albuquerque, New Mexico; Myrtle Beach, South Carolina; Lexington, Kentucky; Fayetteville, Arkansas; and New Orleans, Louisiana; all cities in HUD Regions IV and VI with 1 percent or less of the total single-family rental market share identified as institutional investors in respective metropolitan areas.⁴⁷ The lack of large-scale investment in certain markets is tied directly to evaluations of the risk-return profile of individual markets, including localized economic factors, market fundamentals, assessments of anticipated demand, and any current or potential regulatory barriers.

Institutional Investor Activity Noticed

The geographic and economic heterogeneity across the nation is also observed in differences in local policies regarding housing. Local attention has heightened as large investment firms convert single-family homes to rentals and, increasingly, construct build-for-rent communities within highly desirable and increasingly unaffordable areas. Advocates for regulation locally — such as homeowners’ associations, local governments, and advocacy groups — often cite declining community involvement and changing neighborhood character as reasons for investor activity increasing costs of housing, thereby limiting the availability of affordable housing options. In recent years, the increase in the number of institutional investments in single-family home purchases and building single-family structures intended for rent has many residents and local governments looking to regulation to mitigate any current or potential concerns. While rental properties typically take the form of either a long-term rental or a short-term rental, regulatory barriers are often aimed at short-term rentals locally.

Pushing Back Against Institutional Investors

Although most of the New Orleans-Metairie MSA lacks developable land, governments have enacted other significant regulatory barriers to institutional investment in the single-family rental market. Beginning in 2017, after investment purchasing significantly increased, the New Orleans City Council passed a series of ordinances requiring data sharing from online platforms and allowing short-term rentals through three different licenses: accessory, temporary, or commercial. By March of 2018, the city granted nearly 4,300 short-term rental licenses.⁴⁸ An additional 2,750 nonpermitted short-term rentals with bookings were found on the Airbnb platform alone as of March 2018. In addition, single operators with multiple listings were using several names to procure multiple licenses. In 2019, in response to requests from local advocacy groups, New Orleans passed a city ordinance requiring new taxes, fees, and either a primary residency or a Louisiana homestead property tax exemption to obtain a short-term license. However, the 5th Circuit of the U.S. Court of Appeals recently struck down the 2019 New Orleans law, stating that restricting short-term rental licenses unconstitutionally blocks nonresidents of Louisiana from owning property in the city.⁴⁹ This decision, which covers Texas, Louisiana, and Mississippi, has implications for other municipalities attempting to curb short-term rental properties in general.

In Texas, the uptick in investment purchasing has prompted various cities and municipalities to enact short-term rental ordinances. In the city of Dallas, no formal short-term rental registration ordinance currently exists. The Dallas City Council, however, is currently considering various zoning restrictions such as instituting zoning requirements, enacting property owner stipulations, limiting the number of residents per dwelling, and barring use of rental properties for entertainment purposes. The Dallas City Council identifies short-term rentals as units that rent daily or weekly for periods of less than 30 days.⁵⁰ The city of Fort Worth has a similar definition for short-term rentals, which currently are allowed only in areas zoned for mixed-use or commercial development. At the beginning of 2022, Fort Worth selected Deckard Technologies to identify short-term rentals in the city and concluded that more than 89 percent of the city’s short-term rentals were either not authorized or operating illegally.⁵¹ The city has proposed four options to regulate short-term rentals: continuing to require short-term rentals to move from residential zones to mixed-use and commercial zones; assigning owner-occupied short-term rentals conditional use permits with licensing requirements; capping the number of short-term rentals at 10 percent of the housing stock and limiting them to areas zoned for multifamily buildings; and allowing a combination of zoning, conditional permitting, and 10 percent caps, either citywide or only within certain neighborhoods.

By comparison, in February 2022, the state of Georgia proposed House Bill 1093 and Senate Bill 494, which would preempt municipalities from enacting or enforcing any restrictions on residential rental agreements of more than 30 days and threatened to withhold state funding for violations. Backlash to the proposed bills was strong, and advocates cited a report for the Federal Reserve Bank of Atlanta stating institutional investors filed 2 eviction notices for every 10 homes they owned, higher than the overall eviction rate in Atlanta.⁵² The Georgia Municipal Association, representing Georgia municipalities, opposed the bill because it would take away city and municipal authority to make build-for-rent decisions. Currently, local and city officials statewide are opposing the bills, maintaining that local governments should be allowed to regulate construction activity within their jurisdictions.

Conclusion

Institutional investment has been robust in many areas nationwide since the Great Recession. According to a 2018 Shelterforce article by Julia Gordon, “During the crisis, America’s homeowners lost $17 trillion of home equity, and millions — perhaps as many as 10 million — lost their homes entirely. But homeowners didn’t get back all that equity when the market recovered. Instead, a significant portion of the gains went straight to the private-equity funds and other corporate investors who bought low and sold high or are still holding properties as single-family rentals.⁵³ Following the surge in investor purchases after the Great Recession, the homeownership rate fell from a peak of 69.0 percent in 2004 to a low of 63.4 percent in 2016.⁵⁴ Although the homeownership rate has risen since 2016, concerns linger that increased investor purchases of homes could cause the homeownership rate to drop once again, which would inhibit Americans’ ability to build wealth through homeownership.

1. iBuyers, or instant buyers, are companies that use technology to buy and sell homes quickly.
2. Laurie Goodman and Edward Golding. 2021. “Institutional Investors Have a Comparative Advantage in Purchasing Homes That Need Repair,” Urban Wire, 20 October.
3. CoreLogic, Inc.; home sales prices are for the 12 months ending July 2022.
4. U.S. Census Bureau. “Table B25024 Tenure by HUD Units in Structure,” 2021 American Community Survey, 1-year data.
5. Joint Center for Housing Studies of Harvard University. 2022. “America’s Rental Housing 2022.”
6. Gross rental yield is the quotient of one year’s entrylevel home rental amount (minus the property tax) and the entry-level home price. John Burns Real Estate Consulting. 2022. “Single-Family Rental Analysis and Forecast,” August.
7. Vicki Been, Ingrid Gould Ellen, and Katherine O’Regan. 2018. “Supply Skepticism: Housing Supply and Affordability,” NYU Furman Center.
8. Paul Emrath. 2021. “Government Regulation in the Price of a New Home: 2021,” National Association of Home Builders, 5 May.
9. Claire Gra. 2021. “An Overview of Single-Family Rentals,” National Multifamily Housing Council Research Notes, 28 September.
10. Richard Fry. 2020. “Millennials Overtake Baby Boomers as America’s Largest Generation,” Pew Research Center, 28 April.
11. U.S. Census Bureau. “Table S0101 Age and Sex,” 2010 and 2021 American Community Survey, 1-year data.
12. John Burns Real Estate Consulting.
13. U.S. Census Bureau. “Table S0101 Age and Sex,” 2010 and 2021 American Community Survey, 1-year data.
14. U.S. Census Bureau. “Table B25003 Tenure,” 2021 American Community Survey, 1-year data.
15. BRG Real Estate. 2018. “Buying an Oceanfront Condo — Part 1,” 3 October.
16. The National Association of REALTORS^® defines institutional investors as companies, corporations, or limited liability companies.
17. U.S. Census Bureau. “Annual Resident Population Estimates for States and Counties: April 1, 2010 to July 1, 2019; April 1, 2020; and July 1, 2020 (CO-EST2020).”
18. U.S. Census Bureau. “DP02 Selected Social Characteristics,” 2021 American Community Survey, 1-year data.
19. Ibid.
20. CoreLogic, Inc. Home sales prices are annual data for 2017 and 2021.
21. Tarrant County, Texas. “2021 Tax Rate Calculation Worksheets” (access.tarrantcounty.com/en/tax/property-tax/2021-tax-rate-calculation-worksheets.html).
22. Dallas County, Texas. “Past Tax Rates” (www.dallascounty.org/departments/tax/past-tax-rates.php). Accessed 30 November 2022.
23. U.S. Census Bureau. “DP05 ACS Demographic and Housing Estimates,” 2020 American Community Survey, 5-year data.
24. U.S. Census Bureau. “DP04 ACS Selected Housing Characteristics,” 2020 American Community Survey, 5-year data.
25. U.S. Census Bureau. “DP04 ACS Selected Housing Characteristics,” 2016 American Community Survey, 5-year data.
26. CoreLogic, Inc. Home sales prices are annual data for 2017 and 2021.
27. Ibid.
28. U.S. Census Bureau. “DP03 Selected Economic Characteristics,” 2016 American Community Survey, 5-year data.
29. U.S. Census Bureau. “DP03 Selected Economic Characteristics,” 2020 American Community Survey, 5-year data.
30. Costar Group, Annual data.
31. U.S. Census Bureau. “DP04 Selected Housing Characteristics,” 2016 American Community Survey, 5-year data.
32. U.S. Census Bureau. “DP04 ACS Selected Housing Characteristics,” 2020 American Community Survey, 5-year data.
33. CoreLogic, Inc. Home sales prices are annual data for 2017 and 2021.
34. U.S. Census Bureau. “DP03 Selected Economic Characteristics,” 2016 American Community Survey, 5-year data.
35. U.S. Census Bureau. “DP03 Selected Economic Characteristics,” 2020 American Community Survey, 5-year data.
36. CoStar Group, Annual Data.
37. U.S. Census Bureau. “DP04 ACS Selected Housing Characteristics,” 2016 American Community Survey, 5-year data.
38. U.S. Census Bureau. “DP04 ACS Selected Housing Characteristics,” 2020 American Community Survey, 5-year data.
39. U.S. Census Bureau. “DP05 ACS Demographic and Housing Estimates,” 2020 American Community Survey, 5-year data.
40. CoreLogic, Inc. Home sales prices are annual data for 2017 and 2021.
41. U.S. Census Bureau. “DP03 Selected Economic Characteristics,” 2016 American Community Survey, 5-year data.
42. U.S. Census Bureau. “DP03 Selected Economic Characteristics,” 2020 American Community Survey, 5-year data.
43. CoStar Group, Annual Data.
44. Alexandra Ciuntu. 2022. “Built-to-Rent Homes Expected to Hit All-Time High in 2022, Fueled by Need for Space and Privacy,” RentCafe, 20 January.
45. ALN Apartment Data, Inc.
46. Mark Heschmeyer. 2022. “Blackstone’s Single-Family Rental Firm Pauses Some Purchases in Rare Pullback for Surging Property Type,” CoStar News, 31 August.
47. John Burns Real Estate Consulting.
48. Airbnb. 2018. “Data Report,” data analysis for the city of New Orleans.
49. Kevin McGill. 2022. “New Orleans Short-Term Rental Rule Struck Down by Court,” Associated Press, 23 August.
50. Matt Payne. 2022. “Dallas City Council Considers New Rules, Registration Program for Short-Term Rental Properties,” Community Impact, 4 May.
51. Deckard Technologies. 2022. “City of Fort Worth: Short-Term Rental Final Report.”
52. Elora Raymond, Richard Duckworth, Ben Miller, Michael Lucas, and Shiraj Pokharel. 2016. “Corporate Landlords, Institutional Investors, and Displacement: Eviction Rates in Single Family Rentals,” Community & Economic Development Discussion Paper No. 04-16, Atlanta Federal Reserve.
53. Julia Gordon. 2018. “The Dark Side of Single-Family Rental,” Shelterforce, 30 July.
54. Federal Reserve Economic Data. 2022. “Homeownership Rate in the United States,” Federal Reserve Bank of St. Louis.
55. John Burns Real Estate Consulting.
56. Will Parker. 2022. “Home Builders Offer to Sell Homes in Bulk at Discount to Investors,” Wall Street Journal, 3 October.
57. Lauren Lambie-Hanson, Wenli Li, and Michael Slonkosky. 2022. “Real Estate Investors and the U.S. Housing Recovery,”Real Estate Economics 50:6, 1425–61.